Turbocharge your ISA with these oil ETFs

Thanks to the introduction of Exchange Traded Funds, it's now possible for amateur investors to gain access to markets that were previously open only to the professionals.

There is now a lot of interest from private investors in energy commodities such as oil and gas. Although it's possible to trade these ETFs in order to turn a profit, they are also useful in hedging. By buying commodity ETFs it's possible to benefit from rises in petrol, heating oil and other energy commodites. As such they can perform a valuable hedging service to cancel out petrol or heating oil price rises.

ETFS Securities offers a number of energy ETFs which are listed on the London Stock Exchange (LSE). They may be purchased within a stocks & shares ISA or a Self Invested Personal Pension (SIPP). Most fund supermarkets and online discount brokers allow trading in these ETFs.

The ETFS Securities energy ETFs allow investors to track the price of energy commodities through the use of futures contracts. Energy commodities that may be invested in include:

• Oil (including crude oil, Brent crude and WTI oil)
• Gasoline/Petroleum
• Heating Oil
• Natural Gas
• Carbon

Of the many different energy ETFs on offer, the two most popular with smaller investors are ETFS Crude Oil (stock symbol: CRUD) and ETFS Natural Gas (NGAS). Both have low annual fees of less than 0.5%, although there are of course dealing charges involved with buying these ETFs.

Some of the more popular choices are available as a number of different ETFs that allow different parts of the forward futures curve to be tracked.

Oil is mainly traded in US dollars, but a number of the energy commodities offered by ETFS Securities are also priced in pounds sterling. Commodity are very sensitive to the value of currencies, so this is something to take into consideration when trading these energy commodity ETFs. Since the financial crash of 2008 the pound/dollar exchange rate has been particularly volatile, and in previous decades such wild swings in currency exchange rates would have been considered a currency crash.

For investors who are particularly bullish about energy prices, a number of these commodities are available as 2x leveraged ETFs. If the price of gasoline rises 4%, then a leveraged ETF will rise in value by 8%. Of course, the reverse is also true, so leveraged ETFs are for brave investors who know what they're doing.

For investors who are taking a more negative view of energy prices, most of these commodities also have short ETF equivalents. If the price of a commodity falls, then the price of the short ETF will rise. Short ETFs are therefore a way of being able to profit from falling commodity prices.

Although these ETFs are supposed to track the spot prices of the underlying energy commodity, they are susceptible to contango and backwardation. This tends to happen if prices rise or fall quickly, as seen in the 2008 oil price spike when oil prices almost reached $150 a barrel.

For US based investors there are also a number of oil ETFs, the most popular being the United States Oil Fund (NYSE ticker: USO).

If commodity ETFs sound confusing, then another way of making money from rising oil prices is to buy shares in oil companies. The UK's two biggest oil companies - BP (BP-) and Shell (RDSB) both pay decent quarterly dividends (not guaranteed). There are also mid-sized oil companies such as Tullow Oil, as well as a myriad of smaller companies mostly involved with exploration for new oil reserves. Small companies can sometimes be hugely profitable, but only if the company finds a big oil well!

Good luck with your energy based investments, and remember to seek advice if you have any doubts about the suitability of an investment.

The author of this article is not authorised to give financial advice. This article does not consitute financial advice. Before making investment decisions consult an independent financial advisor.