It's been a lucrative month to own the BetaShares Crude Oil Index Currency Hedged Complex ETF (ASX: OOO). Exactly one month ago, this exchange-traded fund (ETF) was asking $5.72 per unit. Today, those same units are fetching $7.47 each at the time of writing. That's up 30.6% in four weeks.
It's no secret why this oil-based ETF has fared so well.
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A futures ETF?
The BetaShares Crude Oil ETF is a rather unique ASX fund. Rather than holding a portfolio of underlying stocks or bonds, as most ETFs do, it instead offers investors exposure to a portfolio of futures contracts. Futures contracts are derivatives that represent the value of a commodity, to be delivered in the future, at a price determined in the past or present. They are commonly used by both businesses and investors to mitigate risks associated with volatile commodities.
To illustrate, an oil-based futures contract might stipulate that 1,000 barrels of crude oil are to be delivered on 31 December 2026 at a price of US$60 per barrel. If the contract was made when oil prices were at US$60 a barrel, and the oil price rises to US$80 soon after, then that contract's value just increased. Of course, it works the other way as well.
The OOO ETF holds a basket of these contracts. Given the sharp increase in the price of oil this week as a result of the new US-Iran war, it's no surprise to see the value of OOO units rise rapidly in response.
We've also seen other energy-focused ASX ETFs react similarly on the ASX this week. One example is the BetaShares Global Energy Companies Currency Hedged ETF (ASX: FUEL). This ASX ETF doesn't hold futures contracts. Instead, it opts for the traditional ETF model of holding an underlying portfolio of global energy stocks like Chevron, ConocoPhillips, Shell and ExxonMobil. FUEL units have risen by almost 6% over the past month.
Is it too late to buy funds like OOO and FUEL?
Investors might be looking at these gains and wondering whether it's worth jumping on this train.
While it might be tempting to look at what's going on with oil prices and conclude that either OOO or FUEL might be a good way to insulate your ASX share portfolios, I think that would be a mistake.
Oil is a highly volatile commodity at the best of times. But this volatility has reached unprecedented heights over the past week. On any given day now it seems, oil can move by double-digits in either direction. Whilst you might be able to time a trade perfectly to take advantage of one of these upswings, there's just as likely a chance that you can be caught out by a downturn. You may as well go down to the casino and put it all on red.
Further, commodity-specific ETFs like OOO and FUEL tend to charge relatively high management fees and deliver low long-term gains. At least compared to market-wide index funds.
As such, I think ASX investors would be better off finding high-quality companies that compound their earnings every year and buying them at a good price over trying to take advantage of the whipsawing energy prices that we are seeing.
