Crude Awakening

NEW YORK (MarketWatch) — Most of us can’t stockpile barrels of crude oil in the backyard, nor would we want to. Yet with oil prices soaring, many investors are eager to fill their portfolios with this precious fuel.

Accordingly, a specialized group of exchange-traded funds taps into oil rallies. But investors should be aware that while these funds have been posting solid gains, they are complex, risky instruments which don’t fully capture oil-price moves.

At best, these oil-linked ETFs, which trade on an exchange like stocks, are an indirect pipeline to oil. That’s because unlike some gold and precious metals funds, oil ETFs don’t hold the physical commodity. Instead, they trade oil futures contracts, and that can impact investment returns in ways unsophisticated buyers never expected.

“There is no way to directly invest in oil,” said Bradley Kay, an ETF analyst at Morningstar. “Indirect investments such as oil company stocks, futures, and oil ETFs tend to have a lot of complicated moving parts.”