The Good And The Bad Of Oil ETFs

Nearly halfway through 2017, one thing investors have heard plenty of is how poorly oil is performing. Crude is one of this year's worst-performing commodities, a theme reflected by a batch of exchange traded products.

Just look at the PowerShares DB Oil Fund DBO, which is down 16.4 percent year-to-date. Many oil ETFs have been besieged by outflows this year, but some market observers argue those outflows belie the oil market's decent fundamentals. For its part, DBO has lost $7.4 million in assets this year, which is better than some rival ETFs and a small percentage of DBO's $371.2 million in assets under management.

Weighing on investments is the tussle between the Organization of Petroleum Exporting Countries and North American shale producers. Some OPEC members and other major oil-producing nations outside the U.S. have been scaling back production to normalize pricing. However, shale producers are keeping the market awash in supply, neutralizing the effect of production cuts in the process.

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Shrinking Spread

"Interestingly, but not surprisingly, OPEC’s most recent cuts to US-bound oil shipments resulted in a shrinking spread between West Texas Intermediate (WTI) crude oil, which is the US oil benchmark, and the higher-priced European benchmark Brent crude oil," said PowerShares in a recent note. "That’s because energy traders assumed that oil not sent to the US would probably end up in Europe in the near term, raising prices in the US while pressuring prices lower abroad. Indeed, this spread has moved significantly over the past week, as WTI went from trading $2.96 per barrel less than Brent on May 18 to only $2 less on June 7."

For investors willing to bet on an oil rebound while not committing to a dedicated oil ETF such as DBO, a diversified commodities fund such as the PowerShares DB Commodity Index Tracking Fund DBC can be useful.

The $1.82 billion DBC, which tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, allocates about a quarter of its weight to crude oil, but also features exposure to 12 other commodities.

"While there will be blips in the volatile weekly numbers, I do expect the trend in lower US crude oil inventories to continue throughout 2017, pushing up 2017 and 2018 futures prices for WTI. This would potentially benefit commodity funds that carry significant exposure to energy commodities," said PowerShares.