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DEFINITION of 'Oil ETF'

A category of exchange-traded funds that invest in companies engaged in oil and gas discovery, production, distribution and retail. Some oil ETFs may be set up as commodity pools – with limited partnership interests instead of shares – and invest in derivative contracts such as futures and options.

The benchmark target for an oil ETF may be a market index of oil companies or the spot price of crude itself, and funds may be focused on just United States-based companies or invest around the world. There are even inverse ETFs for oil and other sectors that move in an equal and opposite direction to the underlying index or benchmark. Oil ETFs will attempt to track their relevant index as closely as possible, but small performance discrepancies will be found, especially over short time frames.

BREAKING DOWN 'Oil ETF'

Oil ETFs have a high level of demand from investors because oil is such a pervasive commodity in the modern global economy. Almost every end product used by people, companies and governments is in some way affected by the price of oil, either as a raw component or through the costs of energy, transportation and product distribution.

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