[andy_wrote]

There are ETFs that track oil futures (basically like a stock, but backed by oil instead of a company). It's been a while since I've looked at any of this, but I think USO is still the most prominent.

There are plenty of things to watch out for with these ETFs. You pay ongoing expense fees. And ETFs, especially those that aren't just holding containers for assets, can have subtleties in their prospectuses that cause their value to fluctuate in counterintuitive ways. There's still a lot to be cautious about.

However, compared to the actual futures, they're more suitable for casual investors, for reasons such as what we see here. They can't go below 0 and don't necessarily involve margin. And the ETF will typically deal with things like rolling the futures position ahead of expiry.

[haltingproblem]

Sorry but this is terrible advice. If trading Oil Futures is akin to playing Russian Roulette then trading Oil ETFs is akin to juggling live hand grenades. One will go off as soon as you stop!

Most commodity and leveraged ETFs are designed to benefit just one party - the designer of the ETF. There are plenty of articles on USO and its travails.

[andy_wrote]

I'm not recommending USO or oil itself as an investment, and I agree that you will be paying money to the ETF manager if you get involved in it.

But I don't agree that USO is _more_ dangerous for a casual trader to trade than oil futures, for the reasons I mentioned.

Removing the overall fluctuations of the oil market, the relative problem with ETFs is that they bleed away value over time. That's a real issue, but I wouldn't compare that to juggling a live hand grenade.

Edit: you did not say it was more dangerous, my mistake. I do think that ETFs are less dangerous, for the reasons I mentioned.

[jldugger]

If I just wanted a ticker symbol for the price of oil to put on a 'market health' dashboard, with no intention of actually investing in the ETF at all, would USO suffice?

[whatok]

> And the ETF will typically deal with things like rolling the futures position ahead of expiry.

This listed as making commodity ETFs more suitable for "casual investors" is the exact reason why they always lose money on ETFs. Retail investors for the most part do not understand contango or backwardation and do not understand (even though it's listed at the beginning of every prospectus) that these are not buy and hold instruments. In fact, I'd argue that it's easier to understand roll costs by actually having to roll futures contracts yourself (which is not difficult at all) vs having it obfuscated away in an ETF.

[kccqzy]

Definitely no. ETFs merely hide the fact that the underlying are futures contracts. ETFs make these futures contracts seem like stocks so any Tom Dick or Harry thinks they understand it and buys them. It's a very leaky abstraction.

> They can't go below 0

One month ago people know that futures can't go below 0. What guarantees ETFs will never go below zero? It's economically absurd to think an ETF holding negatively priced assets will still have positive value.

I would argue that if an investor isn't knowledgeable enough to trade an underlying, the investor shouldn't trade an ETF of these.

[andy_wrote]

The asset value underlying an ETF can be negative, but then the owner of the ETF will just have a worthless piece of paper. The ETF managers will have a problem on their hands regarding the negative amount, though.

In contrast, a futures contract is an agreement to make a future trade, so it can keep going against you past 0. If you are able to take physical delivery, your worst-case scenario is that you pay the money you said you would, and you get your oil. But if you are a casual day-trader type, you probably don't have the ability to take physical, so you may be in trouble (over a barrel, literally).

I agree with you about the dangers of ETFs and about knowledgeability. I didn't mean to advocate for ETFs on an absolute basis, just to make a relative statement about them vs. futures.