Tapping Into Texas Tea

April 10, 2006

The first oil ETF in the US (USO) is now trading on the American Stock Exchange.

The first oil-based exchange-traded fund (ETF) in the United States began trading on the American Stock Exchange (AMEX) on Monday, April 10, ushering in a new era of energy hedging for American investors.  The fund's ticker symbol is "USO."  The fund appears to be an instant hit with investors, as more than 1.5 million shares changed hands in the first ninety minutes on trading.

The fund holds oil futures contracts, and is closely (but not exactly) tied to track the price of a barrel of oil.  As of 10:00am, it was trading hands for $68.23/share.

The fund charges 50 basis points per year in management fees. Trading costs are expected to eat up another 35 basis points annually. The management fee will decline if assets rise about $1 billion.  Regardless, the costs will be more-than-offset by the yield on Treasuries contracts held as collateral for the futures contracts.  In addition, the "roll yield" on the futures contracts will impact the price.

For an in-depth analysis of the various factors impacting the performance of the fund, including a detailed explanation of the roll of the "roll yield," click here.

The fund has initially elected to retain any income above and beyond its expenses, which means that the price could begin to exceed the underlying price of oil. The fund has the right, however, to pay out this income as dividends at any time.

"The fund is intended to give investors exposure to the total return of oil futures contracts, as traded in the U.S.," said John Hyland, the managing director of research for the fund.

Hyland said that the fund could appeal to a wide audience, ranging from individual investors to hedge funds and institutions, and he expects it will be used to gain long-, short- and hedged exposure to the price of oil.

"We're like the Swiss," he said. "We're neutral (on the direction of the price of oil).  If the price of oil goes up 8 percent, we'd like to be up 8 percent … that's our job."

That's unlikely to be the case, for the reasons listed above.  But Hyland said that his group's research suggests that the fund will stick close to the underlying price of a barrel of Western Texas light, sweet crude oil. 

The fund was developed by Victoria Bay Asset Management, LP in close coordination with the AMEX, Alps Distributors and Brown Brothers Harriman.  Bear Wagner serves as specialist for the fund, which Hyland referred to as an "ETS" for "exchange-traded share" because of regulatory concerns.  We will list the fund on IndexUniverse.com with ETFs.

Credit the AMEX with landing another major new ETF listing.  As the listing site of both USO and the Deutsche Bank Commodities ETF (DBC), the AMEX has the listing for both of the futures-based ETFs on the market in the U.S.  That must make the New York Stock Exchange at least a little nervous...

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