I often hear from oil bulls and bears about profiting off of oscillations in oil. There’s no problem giving it the old college try, there are definitely some telegraphed moves that you can see coming. However, the way ETF’s work make it extremely difficult, if not downright impossible to make money on moves in commodities.

And let’s face it, 15 years ago it seemed oil and other commodities went up every day. But those days are over. The US makes a lot of its own oil and there so many positive supply factors for there to be any hope of oil making it back to $60 in the next 20 years. The US produces and exports so much of its own, and we are moving back toward higher interest rates, a stronger dollar, and therefore lower oil prices.

If you are bullish on oil, you are better off buying Valero or Tesoro, refineries that make money and pay out dividends the more petroleum they refine. They are the toll operators, so to speak, that make money as oil production and sales volume ramps up.

Here’s the problem with trying to invest directly in commodities.

There are dozens of ETF’s and ETN’s that track the prices of commodities and even volatility. But they way they work does not work in the average investor’s favor.

Two reasons are at play. The first is that there are fees associated with these funds, it is usually a negligible 0.5-1.5% of any percentage move to the upside. But that’s not the problem.

If you see a move coming in oil, it will track the gains and losses per day. So, if you think oil is going down 20%, say, $50 to $40, that is a predictable move if you see supply increasing, production increasing and the dollar gaining strength.

But that doesn’t mean you can make money off of these projected moves. As mentioned, these ETF’s track daily movements. Their movements are confined to the percentage move of the commodity. It mirrors the commodity, but owning these ETF’s does not mean directly OWNING commodities. A common misconception with owning an ETF like $USO or $OIL is that it doesn’t mean you own a stake in a barrel of oil. If that were possible you could make plenty off of upward moves in oil.

Instead these oil ETF’s act like a stock that move the same percentage as oil daily. So imagine this:

You buy USO, the oil ETF, at $10. Oil is at $40. You think oil is going to $50. Sounds like you’re easily going to make 20% right?


If the price does not go to $50 in a straight line you will not make 20%. That is the only situation to make money off of this move. If it goes up 4% the first day, then down 2% the next, you are going to see the ETF go up 40 cents. The next day oil goes down 2%, your ETF is going to go down 2% of $10.40, the gain you made yesterday, to $10.19. So instead of being up 2% after those two days, you missed out on .1%. Say oil goes up 5% the next day. You are now getting a 5% gain off of $10.19, or $10.70. But oil does not trade so perfectly. You are more likely to see little .5% moves up and down on the way to $50, and might end up making 3% off of a 10% move, because you cannot own a physical barrel of oil.

It sounds complicated because it is. When oil makes an EVENTUAL move to 10% or 20% to the upside, the ETF that tracks it is going to move up and down according to the percentage move, it is NOT the same thing as owning a physical barrel of oil. Which is why I say you cannot make money trying to invest directly in oil. There is not a consumer instrument that lets you own a physical barrel of oil, only the percentage point moves. To make matter worse, when you mix in the fees deducted from the gains, you start to see a dilution in your gains.

You cannot own a commodities ETF for a prolonged amount of time, the only way to make money is if you can predict a substantial move ahead of time, then sell it to lock in those gains. In other words, you need to predict it and time it perfectly, and one or two mistakes can set you back, especially if you have very little money to start with and are spending a lot of it on trading fees.

Also, when you buy a stock, and you have less than $25,000 in your account, you are bound to the T+3 rule, meaning your stock is locked up for 3 days before you can sell it because of ACH clearing. To make matters worse, you’re paying anywhere from $5 to $15 per trade depending on your stock brokerage. That means that you are much more likely to lose money trying to trade with a very small amount of money. You cannot day trade with $200. There is too much stacked against you.

And for this reason, you are better off never touching these oil ETF’s trying to time moves and make little 4 or 5% gains and accumulate wealth. The combination of ETF fees, trading commissions, and imperfect ETF price tracking make the odds severely stacked against the average trader trying to create wealth with a very small amount of money.

You could go so far as to trade with the Robinhood app, which charges $0 to trade, but you are still bound to the T+3 rule where your money is locked up for 3 days after your trade is filled. So by the time your trade clears and you can sell, you have probably lost your gains already. Robinhood is the best way to try to preserve the little capital you have as a small time investor, but it is still very risky to put all of your money into one stock. You may find yourself slowly grinding your money away by a few 2 or 3% losses in a row that set you back too much to later buy a winning stock and make your money back.

Your best bet is to wait until you have $5,000 or $10,000 to invest before you take the plunge into the stock market.

But let’s face it.

You should just go buy cryptocurrency.