Crude Oil ETFs Built For Different Needs

December 29, 2011

Knowing how an oil fund chases price appreciation is key first step for investors.

Commodity prognosticators’ crystal balls are filled with crude oil. Brent and West Texas Intermediate oil are seen by many to be the commodities with the strongest upside potential in 2012, with possible major geopolitical events weighing heavily on the supply and demand equation.

In addition, Goldman Sachs forecast this month that Brent crude oil will reach $120 a barrel in 2012, which would represent more than a 10 percent gain from today. The firm noted that emerging market demand will remain strong through next year, pouring more demand on what many consider to be outstripped supply.

On top of forecasts like Goldman’s, Libya’s uncertain resumption of oil production and Iran’s threats to disrupt oil flow if economic sanctions are imposed could heavily impact oil price movements. Add it all up and it’s no surprise that many investors would consider a move into “black gold.”

For the average investor, buying physical crude oil is impractical. Buying barrels of oil presents a storage problem, assuming you don’t own an oil tanker, never mind liquidity issues. And when it comes to the futures and options markets, investors can become easily overwhelmed.

There are easier alternatives, though. Exchange-traded products that offer a pure oil play based on futures contracts can be a much more palatable option.

Many Different Flavors

All 14 oil ETFs and ETNs are not the same when it comes to the underlying securities. For starters, oil funds focus on one of two types of crude oil — Brent oil from European and Middle Eastern production lines, or West Texas Intermediate oil that is distributed in Cushing, Okla. And once you’ve picked your oil of choice, matching how your ETF acquires exposure with an investor’s timeline for a rise in prices is critical.

For instance, the United States Oil Fund (NYSEArca: USO), which has the most assets under management for an oil ETP, with $1.2 billion, only invests in front-month WTI contracts on NYMEX. That means it only gives investors exposure to short-term movements in oil.

The downside is that holding USO for the long term risks exposure to the effects of contango, which refers to futures contracts that become more expensive with each successive monthly contract. This undermines returns as fund managers roll into more expensive front-month contracts to maintain exposure.

There are, however, oil funds built for a longer-term holding that minimize the effects of contango.

Products like the PowerShares DB Oil Fund (NYSEArca: DBO) and the PowerShares DB Crude Oil Long ETN (NYSEArca: OLO) track benchmarks that invest in contracts with the greatest amount of backwardation, which is the opposite of contango. Backwardation occurs when spot prices exceed futures prices and each monthly contract decreases moving forward. In this case, rolling futures contracts delivers added returns.

 

Total Return
Name Ticker AUM
($, M)
Expense Ratio 30-Day
Avg Volume
6-Month 1-Year
United States Brent Oil BNO 76.57 1.00 57,491.70 3.54 19.54
Teucrium WTI Crude Oil CRUD 5.36 1.54 1,093.23 -4.45 --
PowerShares DB Oil DBO 551.62 0.75 481,717.03 2.78 2.82
United States Short Oil DNO 11.64 0.96 20,161.73 -12.02 -11.98
PowerShares DB Crude Oil Double Short ETN DTO 96.60 0.75 508,364.53 -25.12 -24.32
iPath S&P GSCI Crude Oil Total Return ETN OIL 456.96 0.75 543,236.63 6.36 -0.66
iPath Pure Beta Crude Oil ETN OLEM 5.68 0.75 1,764.17 5.76 --
PowerShares DB Crude Oil Long ETN OLO 12.35 0.75 10,777.20 2.32 2.33
ProShares UltraShort DJ-UBS Crude Oil SCO 109.91 0.95 1,663,928.38 -25.73 -26.00
PowerShares DB Crude Oil Short ETN SZO 15.28 0.75 12,266.40 -10.70 -8.70
RBS Oil Trendpilot ETN TWTI 4.20 1.10 1,114.47 -- --
ProShares Ultra DJ-UBS Crude Oil UCO 277.09 0.95 1,624,316.63 3.71 -15.66
United States 12 Month Oil USL 183.92 0.60 83,435.10 2.94 2.75
United States Oil USO 1,123.96 0.75 11,465,515.00 5.93 -0.85

 

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