The price of oil hit the $100 per barrel level for the first time since September 2008 because of concern about the unrest in the Libya. Most investors attempting to take advantage of the rise in the price of oil futures have a few options. Since most investors do not have a futures account, the option of buying and selling oil futures is out of the question. There is also the issue of taking delivery of the oil futures if they are not sold - that could be a major problem for most.
In lieu of buying futures, investors can turn to the exchange-traded products (ETPs) that buy oil futures. The United States Oil Fund (NYSE:USO) is designed to track the movements of light sweet crude, also referred to as West Texas Intermediate. USO's portfolio consists of oil future contracts and other oil-related futures, swaps, and forwards. USO could run into issues with contango when the fund must sell their front month contracts and buy the next month. If the price of the next months contract is higher than the prior contract it is termed contango and could hurt the overall performance of USO and create a tracking error. The expense ratio for USO is 0.45%.

To avoid potential contango, the same company created the United States 12 Month Oil Fund (NYSE:USL). The fund will hold 12 oil futures contracts that span the next 12 months thus eliminating any major losses the fund may encounter due to contango. The expense ratio is 0.60%.

Minimizing Oil Contango
The PowerShares DB Oil Fund (NYSE:DBO) is similar to USO in that it does not spread out its oil futures contracts over a long period of time. However, they do implement what they call the optimum yield strategy, which seeks to minimize contango by looking for contracts in months that will generate the highest implied roll yield.

The iPath S&P GSCI Crude Oil Total Return ETN (NYSE:OIL) reflects the returns that are potentially available through an unleveraged investment in the crude oil futures contract. Because OIL is an ETN, the investor is putting its faith into the creditworthiness of iPath and the returns could vary from that of the other funds above. (Learn more about ETN risks in ETN Credit Risk May Outweigh Benefits For Some.)

Bottom Line
Overall the world of oil funds is very complicated and can be a daunting task for investors trying to decide what's best for their portfolio. In a nutshell the best choice at this time is probably USL because it will eliminate the contango issue, which has been a major problem for the funds in the past.

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Tickers in this Article: USO, USL, DBO, OIL

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