Teucrium Rolls Out Crude Oil ETF

February 23, 2011

Teucrium jumps into wild world of crude with a new futures-based ETF.

Teucrium Trading, the Brattleboro, Vt.-based company specializing in futures-based commodities ETFs, will launch a crude oil ETF today that seeks to smooth out returns by simultaneously holding three different NYMEX crude contracts at any given time.

The Teucrium WTI Crude Oil Fund (NYSEArca: CRUD) will hold the nearest to spot June or December contract, weighted at 35 percent. It will also hold the June or December contract following the aforementioned, weighted at 30 percent, and the final 35 percent holding will be in the next December that follows the aforementioned contract, according to information posted on Teucrium’s website.

The weighting scheme is the latest attempt in an ETF wrapper to grapple with how prices on a futures curve can vary. In particular, contango—when near-term prices are cheaper than those in the future—can significantly harm returns as fund managers roll exposure into new, more expensive contracts when a particular contract expires.

Crude oil prices have been rising steadily in recent months amid signs of renewed economic growth in the developed world and a continuing demand pull from emerging market countries such as China. More recently, it is spiking in the wake of political upheaval in Middle East, particularly Libya, a major petroleum exporter. NYMEX crude jumped 8.5 percent on Tuesday to $93.57 a barrel.

Teucrium is charging a 1 percent annual management fee. That’s the same price it charges on its two other commodities ETFs, the Teucrium Corn Fund (NYSEArca: CORN) and the Teucrium Natural Gas Fund (NYSEArca: NAGS). The company rolled out CORN last June and launched NAGS on Feb. 1, 2011.

Minimizing the effects of contango has drawn much attention in the world of futures-based ETFs, and many funds have different methods of dealing with the problem. The United States 12-Month Oil Fund (NYSEArca: USL), for example, owns 12 successive contracts. It costs investors 0.60 percent.

Also, the PowerShares DB Oil Fund (NYSEArca: DBO) uses what the company calls its “optimum yield” index that picks contracts with a view to minimizing contango and to maximizing so-called backwardation. That’s the opposite of contango, when the soonest-to-expire contract is the most expensive, and prices cheapen with each succeeding contract on the futures curve. DBO costs investors 0.75 percent a year.

 

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