Find An Energy ETF, Get Exposure To An Energy Commodity Index
With the recent strong rise in commodity prices, growing attention has focused on the energy etf (exchange traded fund) as a way for investors and traders to gain exposure to this important sub-sector of commodities.
Due to strong economic growth globally, and especially in developing economies like China and India, the demand for energy has soared and with it the cost to consumers. Across the world we witness rising prices for gas and electricity and these trends are forecast to continue.
Indeed, OPEC has estimated that crude oil demand will increase by 50% between 2008 and 2030.
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Energy ETF’s are gaining popularity due to the above trends and because they offer a relatively straightforward means of exposure to the price changes of key energy commodities. Using an energy ETF a trader could for example track the price action of light, sweet crude oil in a passive way without needing to use commodity futures.
Getting into crude oil
You could for example consider the United States Oil Fund (Amex:USO), or if you particularly want exposure to the price change of gasoline, then the United States Gasoline Fund (UGA) would be a possibility.
Two other areas to consider would be those covering two distillate products of crude oil, namely United States Heating Oil Fund (UHG) and United States Natural Gas Fund (UNG).
Another fund focusing on the light, sweet crude oil price is iPAth S&P GSCI Crude Oil Total Return Index ETN (NYSE Arca: OIL) from Barclays Global Investors.
Strictly, this is an exchange traded note (ETN) and it takes an unleveraged position in NYMEX West Texas Intermediate oil futures.
There is also a way of diversifying across a number of different products within the petroleum range, through for example the Powershares DB Energy Fund (Amex:DBE).
This fund managed by DB Commodity Services LLC is based on an index compiled by Deutsche Bank containing some of the most actively traded global energy commodities.
The index which is rebalanced annually, usually in November, contains light sweet crude, brent crude, heating oil, RBOB gasoline and natural gas, each component representing 22.5% of the fund except natural gas at 10%.
Alternative funds are available to UK traders and investors.
For UK based investors the option is to invest in an energy ETF or ETC (exchange traded commodity) that is issued based on a prospectus approved by the UK Financial Services Authority, even though the actual securities may be regulated under another jurisdiction. In the case of ETFS Securities it is the Jersey Financial Services Authority.
An example is the ETFS Energy DJ-AIGCI (LSE:AIGE) zero coupon note which tracks the DJ-AIG Energy Sub-Index, paying a capitalised return which accumulates daily.
Weighting for this exchange traded commodity (ETC) index changes over time as the prices of the constituents change. The four components of the security are WTI crude oil, natural gas, unleaded gasoline, and heating oil.
There are other ETC’s from ETFS Securities which offer varying degrees of diversified exposure to the energy sector by tracking different components of the DJ-Energy Sub-Index.
With the trend growing for large institutional investors such as pension funds to adjust their investment allocations to include real assets such as commodities, the role of ETF’s will grow significantly.
Investment and tax rules can vary depending on which tax jurisdiction you reside in. While it is possible to lose more than your original investment when trading commodity futures through use of leveraging, an investment in ETF’s may result in a loss of all your capital but not more than the original amount.
No doubt as new forms of energy are developed in the future, new types of energy ETF will be developed. With strong global demand for energy forecast to remain, this sector of the commodity universe looks set to go from strength to strength.
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