Trading is set to begin on Monday, April 3, for the first oil-based exchange-traded fund (ETF) to come to market in the U.S. According to a report this morning in the Wall Street Journal, only a final, routine green light from the Securities and Exchange Commission (SEC) stands in the way of the ETF trading on Monday. Sources close to the launch confirmed the news to IndexUniverse.com this morning.
For complete information on the ETF, see the SEC registration statement, which reflects a number of changes to the product since we originally reported on it in May of 2005.
For a crib sheet overview of how the oil ETF will operate, read on.
Shares in the ETF will represent ownership in U.S. Oil Fund LP (ticker symbol: USO), which will be managed by Victoria Bay Asset Management, an operator of commodity pools. The launch of the oil ETF has been highly anticipated and would come on the heals of the recent launch of the first U.S. commodities ETF, the Deutsche Bank Commodities Index Tracking Fund (DBC).
The U.S. Oil Fund is slated to have annual management fees of 0.50 percent for the first $1 billion in assets and 0.20 percent for assets over a billion dollars. This represents a slight increase over the 0.40 percent/ 0.20 percent fee schedule listed in the original filing (the fund changed its name from the New York Oil ETF to the U.S. Oil Fund in September 2005). This is in contrast to the total expense ratio of the Deutsche Bank Commodities ETF, which after lowering fees, now charges around 1.3 percent in annual expenses. The U.S. Oil ETF filing also indicates anticipated brokerage fees of 0.35 percent for the purchase of both Treasuries and futures contracts.
Brown Brothers Harriman & Co. will serve as the fund custodian and administrator, while ALPS Distributors will be the marketing agent. KV Execution Services (Bear Wagner) is slated to be the specialist for the ETF.
The U.S. Oil ETF and Deutsche Bank Commodities ETF share a similar structure, in that the underlying portfolio consists of mostly fixed income instruments (generally U.S. Treasuries), futures contracts and assets held as margin for the futures contracts. The U.S. Oil ETF filing indicates that the portfolio is expected to maintain 5-10 percent of assets as margin, and hold the rest of the cash in Treasury notes, thereby earning the fund significant income and some tax complications for investors. Creation units will be of 100,000 units (many ETFs have creation units of 50,000). The S-1 statement lists an initial offering price of $61.58, which reflects the price of crude as of the March 7th.
The objective of the portfolio will be to track the performance of the spot price of West Texas Intermediate light, sweet crude oil, less expenses.
For both DBC and USO, these launches on ETF-inventor AMEX's platform are remarkable for the short amount of time between the original SEC filing and launch. We reported on the original filing for the U.S. Oil Fund back in May of 2005. The Deutsche product came to market on an even shorter timeline. The relatively quick launches point to the vagueries of the SEC regulatory system. The ProFunds leveraged ETF filing, for example, has been languishing at the SEC for more than five years.
USO would not be the world's first oil-based ETF. There are already similar products trading in both the United Kingdom and Mexico, which launched on July 28th and September 29th, respectively. Those products were created by the same group that launched the first gold ETFs, ETF Securities Ltd.
The Europeans also managed to beat the U.S. to the punch in launching the first diversified commodities ETF, with a launch of the EasyETF Goldman Saches Commodities Index ETF in 2004. The lucky folks in Europe also have access to a non-energy commodities ETF, the EasyETF GSNE, which launched on February 10.
More commodities funds are on the agenda in the U.S., however. In addition to the existing oil and commodities listings, there are also a number of competing offerings on the agenda, including an oil-heavy Goldman Sachs Commodities Index ETF from iShares, the silver bullion ETF and an straight oil ETF from Macro Securities (also working with the AMEX). The Macro Securities fund actually registered shortly before the predecessor to the U.S. Oil Trust ETF, although it features a somewhat unusual structure, which may have delayed the review at the SEC. For a full review of all of new ETFs in the works, read this survey article.
For an article reviewing and comparing the various crude oil investing options, you can read this article that we published in the Journal of Indexes.
We will soon be posting a more detailed analysis of the oil ETF product. Stay tuned.