The six funds in the Energy segment target the commodities that fuel the world's economy. To varying degrees, natural gas, crude oil and Brent crude play an outsized role in global
“DBE has made the most compelling case” economic activity. The advent of ETFs has provided exposure to these resources in a way that was unheard of just 10 years ago.
Eschewing the traditional middleman in energy investing—the futures broker—ETPs like those found in the energy space provide investors with access to their inherent diversification benefits. But they are not proxies for spot prices—none holds physical crude oil or natural gas, nor could they in a practical manner.
The six products therefore provide varied exposure to energy futures in two structures—commodities pools and ETNs. Each fund employs a unique strategy, whether focusing on consumption weighting (RJN) or dynamically selecting futures contracts to mitigate contango (DBE). The key is determining which strategy fits your view of the best way to get energy futures exposure.
Beyond that, liquidity is the largest differentiator. DBE's $150M asset base provides the most robust market, with over $1M changing hands daily. By comparison, funds like JJE, ONG, RGRE and UBN can go days without a single trade. Fund-closure risk also matters, as every fund but DBE receives a red flag due to low assets.
It's also worth noting that a fund's headline expense ratio does not tell the whole story. Many of the products have lagged their indexes by multiples of their stated expense ratio either due to poor management or variable, path-dependent fee structures. Tracking error is therefore a critical consideration here.
In the end, DBE has made the most compelling case (and earned Analyst Pick honors) not only due to its outsized asset tally and superior liquidity, but thanks to its performance against our benchmark. (Insight updated 03/28/17)
All Funds (5)
DBE $140.22 M 140220839.12247 Most liquid
ONG $679.28 K 679284.4405 No volume, high spreads
UBN $1.5 M 1498779.1448 Lacks liquidity, high closure risk
RJN $8.96 M 8961702.127661 Best Fit
JJE $1.13 M 1125751.3344 Poor tracking, high closure risk
ETF.com Grade as 03/23/17
ETF.com Efficiency Insight
The broad energy segment doesn't see much variation in Efficiency. All funds are reasonably efficient, but not perfectly so. That said, there are a few distinctions to be made.
“DBE is the crowd favorite” is the current crowd favorite, with over $100M in AUM, about 80% of the assets in the segment. Runner-up RJN has less than $25M, and the rest have less than $5M each. Asset levels are the best predictor of closure risk, and we see elevated risk for every fund but DBE. Since all of these funds are structured as ETNs, there is an additional risk that they will delist without actually returning capital, leaving investors to try to sell them OTC, a potentially frustrating and expensive outcome.
Costs vary here. UBN is the cheapest, with an expense ratio of 65 bps, while DBE and RJN sport expense ratios of 71 and 75 bps, respectively. RGRE is the most expensive, at 95 bps.
JJE tracks its index in line with its fee on the median, but with wild swings in either direction, at one point lagging by more than 4%. DBE faces similar issues, though not quite to the same extent. ONG tracks very consistently by roughly the same amount as its expense ratio.
DBE is the only fund structured as a commodities pool, which means those choosing it will receive a K-1 at year-end, will have positions marked to market, and will be taxed at a blended rate. ETN holders forgo the receipt of a K-1 and gains are taxed as capital gains. ETN investors are, however, exposed to the credit risk of the issuer. (Insight updated 03/28/17)
ETF.com Tradability Insight
Liquidity within the segment is rather poor, with the exception of one fund—DBE, which typically trades over $1M per day. In contrast, RJN trades less than $500K most days, while JJE,
“Liquidity within the segment is rather poor” ONG, UBN and RGRE trade less than $25K daily, if anything.
Unsurprisingly, DBE has the tightest bid/ask spread in the segment, at 14 bps average, while the market for the remaining funds ranges from 45 bps on up to several hundred bps. Smaller investors who must deal with on-screen liquidity are advised to use limit orders and consult indicative value before placing a trade.
Fortunately, investors trading in size face a better trading environment. Every fund gets perfect marks for block liquidity—a clear sign that market makers are willing to work with investors in trading the products for a reasonable price. (Insight updated 03/28/17)
ETF.com Fit Insight
There are a number of different ways the products within the Energy segment go about providing exposure to energy futures. Three funds (DBE, RJN and ONG) Fit closely to our
“Three funds (DBE, RJN and ONG) Fit closely to our production- weighted benchmark” production-weighted benchmark in terms of performance, while the other 3 funds (UBN, JJE and RGRE) employ more nuanced strategies.
Near the top of the list is DBE, which differs from our benchmark in that it weights commodities by liquidity (as opposed to production) and dynamically selects futures contracts in an attempt to slow the rate of decay. Although the fund differs significantly from our benchmark in its lower exposure to crude oil, its roll-yield maximizing strategy hasn't produced returns significantly different from our benchmark over the last 5 years.
RJN aligns well with our benchmark by providing exposure to six commodities within the energy space via front-month futures contracts, and weighting its holdings based on consumption as opposed to production.
ONG selects the same 6 energy commodities as our benchmark, but selects contracts dynamically in order to mitigate the effects of contango. The fund doesn't disclose its contracts.
UBN holds 5 different contracts on 6 core energy commodities as opposed to using a front-month contract strategy like our benchmark. It also weights commodities by consumption as opposed to production.
JJE caps its exposure to each commodity, and in so doing, gives crude and Brent hefty haircuts relative to a production-weighted basket. The extra weight goes to natural gas—a commodity that's been in severe contango in recent history. Of the scored funds, JJE deviates most from our segment benchmark.
RGRE is the newest product in the segment. It weights its holdings based on Jim Rogers' calculation of economic importance—which produces a hefty overweighting to natural gas that comes at the expense of oil. (Insight updated 03/28/17)