Best Way to Short Oil

Tull actually recommends a competing product, the U.S. Oil Fund(USO Quote), a commodity pool that holds the front-month oil futures contract, as the best short candidate because it has the most liquidity.

U.S. Oil does have more assets under management, $395 million, than the other four products. That suggests it would be relatively easy to borrow.

Another thing USO has going for it is that it does the best job of the five products of tracking the spot price of light sweet crude -- although the spot price and front-month futures contract don't always move hand in hand.

But this product also generates bigger tax bills than the typical exchange-traded product. Because it only holds the contract for the near month and futures expire, every month the fund needs to roll the contract to stay invested. It sells the near month and buys the next month's contract. Each time it does this it generates a taxable capital gain or loss. These gains are taxed like regular futures contracts. That means 60% of the profits generated in a year are taxed as if they were long-term gains, a rate of 15%, and 40% of the profits are taxed as short-term gains, or ordinary income, which can run as high as 35%.

However, only about 8% of a futures contract needs to be put on margin, and the U.S. Oil Fund invests the remainder in 90-day U.S. Treasury bills, which earn interest that is also taxed as ordinary income. The product has an expense ratio of 0.5%.