Oil has been on a roller coaster ride in the last 12 month. Australian investors can use Oil futures or a Oil ETF to take a position on Oil.
It primarily comprise of West Texas Intermediate (WTI) Crude Oil futures contract. WTI represent the crude oil benchmark for oil produced in the United States. Another commonly quoted oil contract is called the Brent Crude Oil which represent oil produced in the North Sea.
The advantage of using ETF rather than oil futures directly is the greater flexibility in managing the position in the portfolio.
In the instance of commodity future contract, each contract holds fixed number of commodities. Usually the units per contract is too large for retail investors and can increase difficulty in having the appropriate position within the portfolio.
Exchange trade funds like OOO ETF allows investors to manage the position to the dollar within the portfolio. The FX exposure of the Oil ETF is also hedged so Australian investors using on OOO ETF is effectively exposed to the AUD Forward Oil Curve.
Commodity futures are based on the spot price plus the storage and carry cost.
One risk of using ETF is the future roll risk. Roll is is the potential loss in rolling the expiring front month future contract into the next expiry period contract.
The difference between current and future contract is called roll cost. If the future curve is contango, where the future price is higher than spot prices. Roll risk is high as any contract rolling forward would decline gradually to spot price. Vice versa for commodity curve in backwardation.
Oil is a high risk and volatile commodity and no income opportunity. We do not recommend it in any super fund portfolio for low risk investors. The ETF returns are based on the gains in the future contracts. The future contracts does not have a yield unlike the dividend exchange traded funds.