Commodities: Energy Crude Oil
No fewer than eight ETPs offer exposure to a seemingly simple and absolutely vital commodity: crude oil. Because spot oil exposure is impossible to access, all the ETPs gain access to oil
“Structure and exposure are two reasons to look beyond USO” prices using futures contracts, but differ in their exact means. The largest and most liquid ETP in the segment—by far—is US Commodity Fund's USO. With nearly $2B in assets and median daily volume over $400M—not to mention the segment's lowest fee (72 bps)—investors might ask why they should bother to look any further.
Structure is one reason. USO (like many peers) is a commodity pool, so it issues K-1s—with any gains marked to market as if investors sold their shares—and is taxed at a blended rate. Investors not keen on these features might consider an ETN like Barclay's OIL, which is taxed like an equity fund but carries the counterparty risk of the issuing bank.
Exposure is another reason to look beyond USO. USO's front-month futures may provide the next best thing to spot oil in the short run, but position decay from contango can put a major crimp in investors' wallets. Alternative strategies abound including PowerShares' DBO, a "next-gen" product that attempts to pick contracts more intelligently than simply turning the calendar page.
Once you find the structure and exposure you need, be sure to check how well the ETP trades. OLEM from Barclays shows scant daily volume, adding both time and expense to getting in and out. Also check potential choices here for long-term viability. OLEM as well as PowerShares' OLO and RBS' TWTI have tiny asset bases that, in addition to other factors, raise questions about whether they'll be around for the long haul. Lastly, investors new to the space should be clear that none of these products will match the long-term returns of spot oil, which is uninvestable. (Insight updated 10/23/17)
All Funds (12)
USL $96.5 M 96504149 Decent volume
USO $2.27 B 2267084768 Most Liquid
OILB $52.48 M 52475777.512 N/A
OIL $721.2 M 721200413.22 ETN alternative to USO
OLEM $25.77 M 25771734.4705 High Closure Risk
DBO $384.28 M 384279489.31785 Most liquid optimizer
OILK $4.94 M 4935000 N/A
OLO $7.7 M 7699387.2475 Closure Risk
USOI $4.76 M 4761935.821159 N/A
BNO $92.7 M 92700278 Expensive
OIIL $31.85 M 31854701.147044 N/A
OILX $29.66 M 29656200 N/A
ETF.com Grade as 10/19/17
Commodities: Energy Crude Oil
ETF.com Efficiency Insight
Investors in crude oil ETPs can't afford to overlook the nuts and bolts in Efficiency: AUM, fees, legal structures and long-term viability vary widely here, with real impact on
“Investors in commodities pools like USO receive K-1s at tax time” investor experience. USO from US Commodity Funds plays the role of the 900 pound gorilla in the space: The fund can boast of the segment's highest asset base (almost $2B) and lowest fee (72 bps). USO also tracks its index well, though in no case should this be construed as tracking spot oil prices tightly.
Like many ETPs in the space, USO is organized as a commodities pool. Investors receive K-1s at tax time, with gains marked to market as if they sold the shares at year-end. Capital gains are taxed at a "blended" rate, meaning there's no distinction between short-term and long-term.
While USO leads the segments in AUM, two other ETPs also weigh in with huge asset bases: PowerShares' DBO and Barclay's OIL. DBO has over $250M in AUM and charges 72 bps—the same as USO—for its contango-killing methodology.
Meanwhile OIL is similar in heft to DBO, but differs in its legal structure and fees. OIL's ETN structure means it avoids the K-1's that come with commodity pools, and sales of shares are taxed like equities. As a trade-off, OIL is not backed by assets (futures contracts and collateral) but instead solely by the credit of the issuing bank—Barclays in this case. While ETNs are often presumed to have perfect tracking, OIL's end-of-day value varies significantly around its index, in part because its realized fee varies with the level of its index.
Segment leader USO has two sister funds, USL and BNO. These two commodity pools earn similar scores, charge steep fees (98 and 116 bps, respectively) and have modest but adequate asset bases of roughly $50M.
Assets are top of mind for the remaining ETPs. OLO, TWTI and OLEM have under $10M apiece, raising fund-closure concerns. All three are ETNs, so "closure risk" is really the risk that the funds might delist or be called back by the issuer. TWTI stands out in another way, with a fee of 110 bps, second only to BNO. (Insight updated 10/23/17)
ETF.com Tradability Insight
Active traders, institutions and retail investors have a range of highly liquid ETPs to choose from, while some other products in the Crude Oil segment barely trade at all. The 8 ETPs fall
“most days not a single share of OLEM changes hands” into 4 rough tiers. USO from US Commodity Funds stands alone at the top, trading in excess of $100M most days. Tight 3 bp spreads benefit investors of all stripes.
PowerShares' DBO, Barclay's OIL and USO's sister fund BNO land in the next tier of Tradability. These ETPs trade in the millions of dollars most days—a major step down from USO, but still ample liquidity for many investors. Spreads are tight for this trio, sitting in the 5 to 11 bp range.
USL, also from US Commodity Funds, offers viable liquidity for investors using a bit of care. USL trades more than $300K most days, at 10 bp spreads. Active traders will likely look elsewhere, but those wanting to fairly access USL's 12-month futures strategy can do so with some effort.
The remaining three ETPs trade with wide spreads, negligible volume or both. Volume for these ETPs is quite slender—less than $10K typically. OLEM has a median volume of zero, indicating that it doesn't trade at all most days. Spreads range from 32 bps for OLEM to a staggering 200 bps for OLO. Of course, thin volume means that true spreads are effectively unpredictable. If you must trade any of these funds, set a limit order and be prepared to wait for execution. (Insight updated 10/23/17)
ETF.com Fit Insight
All ETPs in the Crude Oil segment use oil futures contracts to gain access to oil prices since spot oil is uninvestable. The relationship of futures prices to spot prices and the shape of
“Front-month exposure isn't the only game in town” futures curve play a huge role in oil ETP performance. Therefore, differences in futures exposure provide a great first cut in drawing distinctions among the eight ETPs here.
USO from US Commodity Funds holds front-month futures contracts like our benchmark for the segment. Front-month exposure typically provides heightened short-term sensitivity to spot oil prices with the trade-off of potential long-term position decay from contango. When futures prices are persistently higher than spot prices, investors' positions erode, as the same dollar invested buys a relatively smaller stake in more expensive contracts. USO's high Fit score perhaps comes as no surprise since it uses front-month exposure just like our GSCI benchmark. The fund's returns match of those of the benchmark extremely well, as shown by r-squared and beta of 1.
Barclay's OIL also uses front-month exposure, but differs slightly from our benchmark. The ETN's slight differences may be attributed to its variable fee structure that ultimately shows up in returns data.
Front-month exposure isn't the only game in town. USL aims to beat the effects of contango by spreading its exposure equally across 12 months of the futures term structure.
Three ETPs aim to mitigate contango using more flexible strategies. DBO from PowerShares, OLEM from Barclays and OLO from Barclays optimize their exposure to the futures curve. All 3 ETPs aim to pick the best available contract each time they roll, rather than picking a particular month by rule. Of the 3, OLEM scores highest not from any advantage from decay but because it Fits our front-month benchmark best. Only DBO shows an advantage on expected decay from its futures-picking prowess, albeit a small one.
The two remaining ETPs stand out for something other than differences in futures exposure. TWTI from RBS attempts to limit downside risk by toggling out of oil exposure and into cash when oil moves below its 100-day moving average for 5-straight days. This approach beat our benchmark over the past year. BNO, yet another offering from US Commodity Funds, offers exposure to Brent oil rather than West Texas Intermediate. Brent is priced at a premium to WTI, which is stuck in landlocked Cushing, Okla. BNO uses front-month exposure but still Fits poorly to our WTI benchmark, as one would expect. (Insight updated 10/23/17)