Oil Money

August 20, 2006

Barclays rolls out its third exchange-traded note, offering a pure focus on crude oil.

Barclays Bank launched its third exchange-traded note (ETN) onto the New York Stock Exchange (NYSE) last week, listing its the iPath GSCI Crude Oil Total Return ETN o under the utterly appropriate ticker symbol "OIL." The new note tracks the performance of an unleveraged investment in West Texas Intermediate crude futures, plus the return that would be earned by an investment of collateral assets in Treasuries.

ETNs are debt-linked instruments that trade much like traditional exchange-traded funds (ETFs); see our primer on ETNs here.  The chief difference is that, unlike ETFs, ETNs do not actually hold a stake in the underlying commodity or commodities futures. Instead, ETNs are simply senior debt notes from Barclays PLC, under which Barclays promises to pay you the exact return of the underlying commodity index - minus an expense ratio of 75 basis points per year.

Earlier this summer, Barclays launched to ETNs tied to the Goldman Sachs Commodity Index (NYSE: GSP) and the DJ-AIG Commodity Index (NYSE: DJP).  Those ETNs currently have assets of $50 and $220 million, respectively.  By comparison, the recently launched iShares GSCI ETF (NYSE: GSG) has just $35 million in assets, while the PowerShares DB Commodity ETF (AMEX: DBC) has assets of $640 million.

The closest competitor to the new Barclays ETN will be the United States Oil Fund (AMEX: USO), a $340 million ETF from Ameristock that launched in April.  Although OIL only launched on August 16, it has already accumulated over $50 million in assets.

One key lingering question about the ETNs is their tax position. Barclays believes - but is not sure - that shareholders will only be liable for long-term capital gains when they sell their funds, and not any short-term gains in the interim period. If the IRS goes along with that ruling, it could significantly alter the landscape of the ETF industry, as the ETNs would have a tremendous tax advantage over their ETF counterparts.  Many experts, however, are dubious that the IRS will rule that way, and the matter is as yet undecided.

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