By now, many ASX investors would have taken note of the global oil price, and its now-remarkable surge over the past month or so. Perhaps some of those investors might be taking a look at the BetaShares Crude Oil Index ETF (ASX: OOO) as a way to profit from this spike in oil prices.
At the end of June, a single barrel of West Texas Intermediate (WTI) crude oil was going for under US$68 a barrel. But as of today, just over a month later, that same barrel is asking US$84.37. That's a massive gain of almost 25%.
But is the BetaShares Crude Oil ETF an effective way to cash in on this rising oil price?
Can you cash in on rising oil by buying OOO units on the ASX?
To answer that, let's take a look at how this ASX exchange-traded fund (ETF) works.
The ASX's OOO ETF is not your typical index ETF. Instead of holding a basket of underlying ASX shares, this fund gives investors exposure to crude oil futures contracts.
Futures contracts are essentially derivatives that allow investors to speculate on the price of a commodity. If oil prices rise above what previous market expectations anticipated, then the value of oil futures also rises.
As such, this ETF allows ASX investors to enjoy some of the returns of a sharply rising oil price.
Indeed, we can see this with the OOO unit price on the ASX. Since 30 June, BetaShares Crude Oil ETF units are up a pleasing 20.5%, having risen from $4.87 to the $5.87 we see today:
However, investors shouldn't always expect returns that mirror the raw prices of oil itself. Here's how the fund provider explains this phenomenon:
The price of oil futures contracts is not the same as the "spot price" of oil. As such, OOO does not aim to, and should not be expected to, provide the same return as the performance of this spot price.
The performance of an ETF that is linked to oil futures may be materially different to the performance of the spot price of oil itself. This is because the process of "rolling" from one futures contract to the next to maintain investment exposure can result in either a cost or benefit to the Fund, affecting returns.
Even so, there aren't a lot of ways that ASX investors can benefit directly from rising oil prices, aside from buying ASX oil shares of course. Most of us don't have the facilities to house hundreds of barrels of raw crude oil in our backyards.
Other considerations for ETF investors today
Still, investors should also keep some other metrics in mind.
Firstly, this ETF charges a relatively high management fee for its services, asking unit holders to pay a 1.29% management fee per annum.
Secondly, most long-term investors in this ETF haven't done too well. As of 31 July, the OOO ETF's ASX investors have lost an average of 15.08% per annum over the past ten years.
So make sure you take all of these facets of the BetaShares Crude Oil ETF into consideration before making an investment.