How to Invest in Oil


 

Space CapsuleDespite my efforts to keep my work and blog worlds separate, word is starting to get around the office that I know a little something about investing.  Actually some people had found out already just because of hallway conversations.  I actually gave a seminar on investing to one interested group at their request. Now that some are finding out about my investing book,  I’m starting to get more questions.

I’m glad to help.  I stated the blog as a hobby with the goal of maybe generating some side income from it, but really it has become somewhat of a ministry.  I’m finding that a lot of people want to learn how to handle money better and to invest.  We have Dave Ramsey in our area and a lot of people are fans, but he kind of leaves off when you get out of debt and doesn’t say too much about what to do next.  And what if you never got into debt to begin with?  What if you’re one of those weird people who went through college without loans.

Today a friend asked my how to invest in oil.  I told him to buy an Oil ETF.  I then explained that an ETF, or “Exchange Traded Fund,” is a relatively new invention that allows you to buy stocks in specific sectors of the market.  They trade like a stock, meaning you call up your broker or fire up your ETrade account and put in a buy order.  

You buy them from another individual, which means that people buying or selling them won’t affect the fund because there is no need for the fund manager to buy or sell shares inside the fund just because someone trades the ETF.  This is an issue for traditional mutual funds that must buy shares when a person sends money into the fund and sell shares to raise cash when people want their money back out of the fund.  (That drives up costs for everyone, which is why some fund managers limit how often you can sell shares then buy them back again.)

The price of shares of ETFs will generally go up when the shares of the stocks they own go up.  This is because when you buy shares of an ETF, you own a percentage of those shares that the ETF has invested into.  You also will receive your share of dividends the stocks within the ETF pay out (some ETFs invested in things like bank stocks or utilities pay good dividends).  If the ETF were ever dissolved, you would receive your portion of the cash.

The very first ETF was created by the Standard & Poor company, the Standard and Poors Depositior Receipts (SPDRs), pronounced “Spiders”, that owned shares of the companies in the S&P 500.  From there they created SPDRs on the small caps and mid cap stock indices.  Then they created an ETF on the Dow Jones Industrial Average, DIA (called “Diamonds.”)  Then things really got interesting when fund companies started to create ETFs on specific industries, like retailers, industrials, high-tech companies, and, yes, oil companies.  

Some ETFs that specialize in oil companies include:

1.  SPDR S&P Oil & Gas Exploration & Production ETF (XOP):

2. iShares Dow Jones US Oil & Gas Exploration & Production ETF (IEO)

and 3. PowerShares Dynamic Energy Exploration and Production (PXE)

So while you can invest in oil companies, should you?  My friend’s reasoning was that because oil prices have fallen so far, they really can’t fall much further so it was a good time to invest.  I’ve found, however, that it is really difficult to time the market.  Oil prices may fall and then just stay down for years.  Just ask gold investors who bought in during the boom of the 1980’s.  They needed to hold on until about 2010 before they got their investment back, and then they were still actually a little underwater because of inflation.  They had also missed out on years’ worth of returns that they could have gotten if they had just invested in common stocks.  They missed out on the miraculous bull market of the 1980’s that it took the Clinton administration eight years to kill with higher taxes!

I do think that ETFs are a great alternative to investing in mutual funds.  For example, if you have an IRA in a standard brokerage account instead of with a mutual fund company, you can buy ETFs just like any other stocks.  They are dirt cheap.  Vanguard even has an ETF corresponding to each of their index funds, so you can pick up an S&P 500 ETF, and REIT ETF, a small cap ETF, and so on.  That is a great way to diversify your portfolio and keep your costs low.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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