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What is a Crude Oil ETF?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 21 September 2018
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A crude oil ETF is a sophisticated investment vehicle that blends the traditional use of commodities futures contracts with modern opportunities for the kind of real-time trading facilitated by the Internet. From beginners to experienced financial trading professionals, many different kinds of individuals are looking at how they can access a vast variety of funds and equities that they can use to build a money-making portfolio. The crude oil ETF is a prime example of some of the newer options that today’s investors are getting educated about.

An exchange traded fund (ETF) has several key characteristics. These types of funds are traded in national exchanges. They are traded in much the same way as a single stock, with a fluctuating price that gets charted throughout a market day. Unlike a stock, though, the ETF is made up of different kinds of securities and equities.

Crude oil is a commodity. Commodities are physical products that are traded in many different ways. Making crude oil commodity values into an ETF requires collecting different investment opportunities based on the value of crude oil, and assembling them into a total investment “basket.” The end result is that a crude oil ETF consists of a “financial product” that is actively managed, bought and sold publicly, and traded at a fixed volume.

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Considering buying into a crude oil ETF often raises many kinds of questions related to the underlying issue of the value of oil. As some financial journalists have pointed out in major media coverage of new markets, the value of oil has the potential to be volatile. There’s also the potential for speculation which can drive prices up or down. Combining this kind of volatility with the intraday trading of an ETF can leave an investor exposed to some significant kinds of risks.

Investors who are making sophisticated plays on crude oil might look at how oil is currently used in its largest markets, where the U.S. represents the one country with the greatest demand for this commodity. They might also study actions by major producers like OPEC, a consortium of oil-producing countries getting together to represent their best interests. The price of crude oil, or refined oil for that matter, is closely intertwined with global politics and policy. All of this means that a crude oil ETF is, in reality, a kind of “political” investment, something that the trader should evaluate through the lens of socioeconomic realities, and not just hard numbers, at least according to some professionals. It’s incumbent on those who want to invest in these kinds of funds to combine good technical analysis and risk research with a general idea of what it means to “cash in on oil prices.”

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