Crude Oil ETFs Built For Different Needs

December 29, 2011



The Brent/WTI Difference

If 2011’s action proved anything, it’s that not all crude oil is priced the same. With the price spread between Brent and WTI reaching nearly more than $25 in the past year, the two crude oils offer varying performance.

The United States Brent Oil Fund (NYSE Arca: BNO) provided the best one-year total return, at nearly 20 percent — much better than its sister product, the WTI-based USO, which saw a loss of nearly 1 percent in its one-year total return.

The sector is also gaining new players. Both the Teucrium WTI Crude Oil Fund (NYSE Arca: CRUD) and the iPath Pure Beta Crude Oil ETN (NYSE Arca: OLEM) debuted in 2011. But while CRUD is down nearly 4.45 percent in total return for the last six months, OLEM gained 5.76 percent in the same time period. Both are based on WTI futures contracts, but with clearly different methodologies.

“In the end, the ETF you choose should be based on future expectations, not past performance. Do investors think WTI will outperform Brent or vice versa?” said Paul Baiocchi, ETF analyst for IndexUniverse. “Secondly, will the contango of years past persist? You can make the right call but actually lose money should you be in a fund like USO when the market is in severe contango.”

And even with the variety of products available, better ideas could be on the way. “Blended funds offering exposure to both Brent and WTI would make a ton of sense,” Baiocchi added.

Even after determining whether to invest in crude oil, evaluating how to actually execute that call when it comes to pure oil funds requires a bigger chore. Drilling down to the underlying securities requires an understanding of how the contracts work and which crude oil they are based upon. A crystal ball can only go so far. “Being armed with so many choices is both a gift and a curse,” said Baiocchi.

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