Kenneth Lamont: With the price of crude oil hovering at levels not seen for over a decade. Some investors may see this as a great opportunity to increase their exposure to the commodity.
One way in which this can be done is by investing indirectly in the equity firms that operate in this space. Investors can buy single stocks such as BP or Shell. Although this approach has a significant idiosyncratic or firm specific risk.
One way in which this risk can be diversified away is by investing in broad sector ETFs such as Lyxor World Energy ETF. By investing in this product investors diversify globally across energy firms operating in the oil and gas space.
Investors looking for a purer exposure to the price of oil may look at the iShares Exploration & Production ETF. This fund offers diversified exposure to the upstream segment of the oil and gas industry.
Upstream equities are generally considered to be particularly sensitive to movements in the price of oil. This can be seen in the relative underperformance of the ETF versus the Lyxor fund. Since the price of oil began to fall in mid-2014.
The three key advantages of investing in this way rather than directly using exchange traded commodities are firstly equity ETFs are UCITS compliant where ETCs are not. Secondly equity ETFs are simpler, investors needn’t concern themselves with the complexities of the futures markets.
Thirdly and perhaps most importantly equity ETFs are generally cheaper than ETCs which makes them more suitable for investors, investing over the medium to long term.
