Guide to Oil ETFs

Compare the first chart chart with the one above, for DBO, which tracks an index that tries to minimize contango. The fund still suffered in February and March of 2009, but that was after briefly outperforming. OLO has the same chart as DBO, and USL shows similar performance.

In sum, investors looking to go long oil with an ETF should look first to DBO, then USL. For an ETN, look first to OLO. Over very short periods of time, USO and OIL may be better bets due to their larger liquidity and the fact that they will perform similarly during normal market conditions. For a day trader, USO or OIL may be best, but as the holding period increases, these funds quickly become more risky and an ETF such as DBO becomes a much better choice.

Leveraged Long. For investors who want to double their oil bet, there's only one choice since the closure of PowerShares DB Crude Oil Double Long ETN (DXO), namely ProShares Ultra DJ-UBS Crude Oil (UCO). The shuttering of DXO highlights the regulatory risk faced by investors in these products and it remains to be seen whether or not UCO falls into the crosshairs of the CFTC or SEC.

UCO offers double the daily return in crude oil and is therefore subject to the same compounding errors as other leveraged ETFs. The product should only be used for short periods and is unsuitable for all but the most aggressive and experienced investors.

Short Oil. If investors want to short oil without leverage, there are two choices: PowerShares DB Crude Oil Short ETN(SZO) and U.S. Short Oil(DNO). The difference with SZO the other PowerShares oil funds is that the short funds do not use the Optimum Yield index. DNO uses the same strategy as USO, except that it shorts the near-month futures contract. Performance between the two has been similar in the long-run.

DNO has higher volume than SZO. Recently, volume picked up when oil declined, but earlier in the year, volume in SZO sometimes fell to below 10,000 shares per day, while that was roughly the low volume for DNO. Therefore, unless oil enjoys a sustained decline that leads to volume increases, DNO is the better choice.

Leveraged Short. Finally, there's the option of going double short in oil with PowerShares DB Crude Oil Double Short ETN(DTO) and ProShares UltraShort DJ-UBD Crude Oil(SCO). These two have equivalent dollar volume over the past three months and their performance has been similar for most of the time, except for the period of "super contango", when DTO outperformed. DTO also resets monthly, as do all the PowerShares crude oil funds, but SCO resets daily.

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