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Oil ETNs

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Oil ETNs, for example OIL (Barclays Funds)  are based on one month futures ans as such are classic fools gold. Retail investor  can be wiped out completely by shorts without any recourse as settlement is at the end of the month that there is no assets held in such funds. This is essentially one month card game.  Classic casino. 

Exchange-traded notes ("ETNs") are unsecured, unsubordinated debt obligations of the company that issues them and have no principal protection.

This is an instrument for short term trading only. After one month you lose money on the way down and you lose money on the way up.  Completely unsuitable for long term investors.  Ration of ETN share to one barrel of WTI fluctuates and increase dramatically with each year. So if you are keeping it for more then several months, you are losing money. And that is substantial money around 20% a year if not more. For example from 2014 to 2015 ration of share price to one barrel on WTI it increased from 4.3 to 5.6  This is more then 20% loss.

Although an ETN’s performance is contractually tied to the market index it is designed to track, ETNs do not hold any assets. Therefore, unlike investors in exchange-traded funds ("ETFs"), which hold assets that could be liquidated in the event of a failure of the ETF issuer, ETN investors would only have an unsecured claim for payment against the ETN issuer in the event of issuer's failure.

Before investing, please carefully consider the credit worthiness of the ETN issuer and the ETNs investment objectives, risks, fees and charges.

Investment Objective

The iPath � S&P GSCI � Crude Oil Total Return Index ETN is designed to provide with exposure to the S&P GSCI � Crude Oil Total Return Index. The S&P GSCI � Crude Oil Total Return Index (the "Index") is a sub-index of the S&P GSCI � Commodity Index. The Index reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract.

 

Performance

1 month -18.37%   3 years -34.36%
3 months -27.82%   5 years -25.15%
1 year -56.97%   Since inception -20.55%
Data through 12/15/2015

Quote Details

Previous close $6.39
Open day’s range 6.40 – 6.66
Net asset value (NAV) 5.85 (12/14/2015)
Daily volume 4,035,452
Average volume (3 months)

4,010,611

Data as of 3:59pm ET, 12/15/2015

Peer Comparison vs. Commodities energy ETFs

  OIL Category
Performance 5-yr return -25.15% -15.19%
Expense Gross exp ratio 0.75% 0.81%
Risk 5 year sharpe ratio -0.59 -0.57
Net assets $768.8M $286.8M

 

Performance Summary as of 10/31/2013

Morningstar assigns a total return percentage rank to an Exchange Traded Fund ("ETF") and Exchange Traded Note ("ETN") relative to all ETFs and ETNs within the same Morningstar category. Rankings are presented in a quintile format. ETFs and ETNs in the top quintile indicate that their total return is in the top 20% of all within the category.

Calendar Year % Returns  as of 10/31/2013

 
  2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
OIL - Market Value -13.26 -1.91 -1.04 11.22 -58.56 47.53 -- -- -- --  
OIL - Indicative Value -12.93 -2.15 -0.81 6.69 -56.70 46.75 -- -- -- --  
Morningstar Long-Only Commodity TR 3.66 -5.32 23.62 20.91 -33.77 31.76 -0.23 25.54 17.63 24.73  
   

Monthly Trailing Returns  as of 10/31/2013

 
  Cumulative Returns   Annualized Returns  
  1 Month 3 Month YTD 1 Year   3 Year 5 Year Since
Inception
8/15/2006
 
OIL - Market Value -6.27 -7.80 4.22 9.45   -0.45 -10.82 -10.30  
 
OIL - Indicative Value -6.18 -7.55 4.16 9.88   -0.42 -10.73 -10.35  
Morningstar Long-Only Commodity TR -1.15 -0.74 -4.68 -7.15   1.63 4.44 6.73  
   

Quarterly Trailing Returns  as of 9/30/2013

 
  Cumulative Returns   Annualized Returns  
  1 Month 3 Month YTD 1 Year   3 Year 5 Year Since
Inception
8/15/2006
 
OIL - Market Value -4.87 8.41 11.20 8.56   2.08 -16.69 -9.59  
 
OIL - Indicative Value -4.52 8.24 11.01 8.43   2.03 -16.52 -9.66  
Morningstar Long-Only Commodity TR -4.06 3.45 -3.57 -8.77   3.96 -0.43 6.78  

Disclosures

The Exchange Traded Note's prospectus contains its investment objectives, risks, charges, expenses and other important information and should be read and considered carefully before investing. For a current prospectus, please click on the Prospectus link.

*The Performance Summary is based on Morningstar's Total Return Percentile Rank. It is the Exchange Traded Note's (“ETNs”) total-return percentile rank relative to all funds and ETNs that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1. The rankings are presented in a quintile format where funds receiving a rank of 1 through 20 by Morningstar will be shown in the top quintile.

For definition of terms, please click on the Data Definitions link. Data definitions provided by Morningstar.

Data provided by Morningstar, Inc.

OIL ETF Holdings, Quote, Analysis, Ratings

ETF.com

Barclays Capital

A company that produces and manages ETFs.

08/15/06

The first date of a fund's operations, as documented by the issuer.

Exchange-Traded Note

The organizational structure of the fund or ETN.

0.75%

The net total annual fee a fund holder pays to the issuer.

$748.63 M

The market value of total assets that a fund has accumulated and now manages on behalf of investors.

$37.22 M

It is the daily dollar value of shares traded, averaged over the past 45 trading days.

0.10%

The iPath S&P GSCI Crude Oil Total Return ETN tracks an index of a single, front-month WTI crude oil futures contract.

OIL is large and liquid, offering straightforward oil futures exposure in an ETN wrapper. It has over $300M in assets, so closure risk isn't an issue, and it trades well in small and large “OIL uses the most basic method: near-month futures contracts” quantities. This means investors can focus on the business at hand: exposure to oil prices. OIL uses the most basic method; namely, near-month futures contracts (spot oil is effectively uninvestable).

OIL's index rolls expiring contracts into the next-nearest month, a straightforward method also used by rival fund USO and our benchmark.

The downside of this approach is heightened sensitivity to negative roll yield when WTI oil futures are in contango. Still, this method of exposure is popular with investors. OIL's ETN wrapper means it's backed by Barclays' credit, but we see low counterparty risk currently. OIL investors get 1099s at tax time, not K-1s.


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[Jan 26, 2016] Why This Oil ETN Is Plunging Even as Crude Prices Rise by By Chris Dieterich

January 21, 2016

Oil prices are rebounding on Thursday, but investors in a popular oil-tracking exchange-traded note are missing out on the gains.

The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) is down 13% even as other oil exchange-traded products like the United States Oil Fund (USO) and United States Brent Oil Fund (BNO) rose about 4%.

Such a stark divergence in performance stems from the ETN's massive price premium over the value of the index it tracks. Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, notes that OIL's premium rose sharply in recent days and accelerated to 48% by Wednesday's close (see chart). He told Barron's that institutional traders noticed the extreme premium and are now betting against OIL on the premise that the unusually large premium will revert to normal. Trading volume in OIL was already more than triple the average over the past month on Thursday with three hours left in the trading day.

Even after today's drop, OIL is still at a roughly 20% premium to its underlying index. Chintawongvanich says that it's not too late for investors who own OIL to ditch it for USO: "You don't want to be stuck holding the bag when this drops to NAV."

This blogger has made the case that index-tracking stock ETFs such as the Energy Select SPDR ETF (XLE) are the best way for long-term investors to speculate on an eventual rebound in oil prices.

Traders may remember that a similar situation cropped up in the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) in 2012. Back then, the ETN stopped tracking its underlying index when it reached a pre-set limit of shares outstanding. Since creating and retiring shares is the grease with which arbitrageurs keep the wheels spinning, TVIX rose to a premium of as much as 89% before plunging violently after the issuing bank announced that it would reopen issuance.

[Dec 27, 2015] Inventories to Sales Ratio Rising

December 25, 2015 | Angry Bear

Try looking at this:

here are oil prices for the last 18 months: http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=18m

here's the graph posted by Edward above, showing only the last 18 months of business inventories to sales ratios… https://research.stlouisfed.org/fred2/graph/?graph_id=275227

[Dec 15, 2015] 10 Most Traded Oil ETFs (USO, UWTI, UCO, XLE, OIL, DWTI, SCO, DBO, VDE, DIG) By Steven Nickolas

Listed are extremely dangerous ETNs, which normal investor should avoid as plague, which the author mistakenly call ETFs
Investopedia

Oil exchange-traded funds (ETFs) provide investors with exposure to companies involved in the exploration and production, distribution, marketing, refining, transportation and drilling of oil. Additionally, some oil-related ETFs may hold futures contracts on crude oil or other oil-related futures contracts or other derivative securities. As with any other security, investors should look to invest in oil ETFs or exchange-traded notes (ETNs) with high degrees of liquidity. A liquid security allows investors to quickly buy and sell the security to prevent a loss or make a profit.

United States Oil Fund

The United States Oil Fund (NYSEARCA: USO) was issued on April 10, 2006, with the sponsorship of the United States Commodity Funds LLC. The United States Oil Fund is managed by Brown Brothers Harriman & Company and charges an annual expense ratio of 0.72%. As of Nov. 5, 2015, the fund has total net assets of $2.75 billion.

It provides exposure to West Texas Intermediate (WTI) light, sweet crude oil and primarily invests in front-month futures contracts on the commodity. Additionally, it may invest in other oil-related futures contracts, forwards and swap contracts.

The United States Oil Fund is one of the most heavily traded oil-related exchange-traded products. Based on trailing three-month data, it has an average daily volume of 29.85 million shares. As of Sept. 30, 2015, the fund has an average annual return of -78.22% since its inception.

VelocityShares 3X Long Crude Oil ETN

The VelocityShares 3X Long Crude Oil ETN (NYSEARCA: UWTI) was issued by VelocityShares on Feb. 7, 2012. The ETN provides three times exposure to the S&P GSCI Crude Oil Index ER, its benchmark index. As of Nov. 4, 2015, the fund only holds crude oil futures contracts expiring in December 2015.

Since the fund must rebalance its position frequently to reflect three times exposure, it charges a high annual expense ratio of 1.35%. As of Nov. 4, 2015, the ETN has total net assets of $950.83 million. UWTI is one of the most traded oil-related exchange-traded products and has an average daily volume of 18.29 million shares over the past three months.

ProShares Ultra Bloomberg Crude Oil

The ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA: UCO) is a leveraged ETF that seeks to provide investment results corresponding to two times the daily performance of the Bloomberg WTI Crude Oil Subindex, its benchmark index. The fund was issued by ProShares on Nov. 24, 2008, and has generated an average annual return of -35.86% since its inception.

UCO is one of the most heavily traded oil-related leveraged ETFs. As of Nov. 5, 2015, based on trailing three-month data, it has an average daily share volume of 7.93 million. The fund primarily holds futures contracts on WTI crude oil and swaps on its underlying index.

iPath S&P GSCI Crude Oil Total Return Index ETN

The iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA: OIL) was issued by Barclays on Aug. 15, 2006. The ETN seeks to provide exposure to the S&P GSCI Crude Oil Total Return Index, its benchmark index. The fund charges an expense ratio of 0.75% and primarily holds front-month futures contracts on WTI crude oil. Based on trailing three-month data, the ETN has an average daily share volume of 4.06 million. As of Nov. 4, 2015, it has total net assets of $889.7 million.

VelocityShares 3X Inverse Crude Oil ETN

The VelocityShares 3X Inverse Crude Oil ETN (NYSEARCA: DWTI) was issued on Feb. 7, 2012, by VelocityShares. This ETN seeks to provide three times the inverse of the daily performance of the S&P GSCI Crude Oil Index ER. To provide inverse exposure to its underlying index, the fund primarily holds front-month crude oil futures contracts. Since this fund must be actively managed, it charges a high annual expense ratio of 1.35%.

As of Nov. 5, 2015, based on trailing three-month data, the fund has an average daily volume of 1.62 million shares. It is best suited for highly speculative traders who only seek daily exposure to the inverse of the S&P GSCI Crude Oil Index.

ProShares UltraShort Bloomberg Crude Oil

The ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO) is a leveraged ETF that provides exposure to crude oil. The fund seeks to offer daily investment results corresponding to two times the inverse of the daily performance of the Bloomberg WTI Crude Oil Subindex. It was issued by ProShares on Nov. 24, 2008.

As of Nov. 4, 2015, SCO has $117.5 million in total net assets. To provide leveraged inverse exposure to its underlying index, it holds swaps from different counterparties on the Bloomberg WTI Crude Oil Subindex. Based on trailing three-month data, SCO has an average daily volume of 1.2 million shares.

PowerShares DB Oil Fund

The PowerShares DB Oil Fund (NYSEARCA: DBO) was issued by Invesco on Jan. 5, 2007. This ETF seeks to provide investment results corresponding to the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund selects its futures contracts based on the shape of the futures curve to minimize the negative effects of contango.

As of Nov. 4, 2015, the fund has $519 million in total net assets. It charges a high annual expense ratio of 0.75%, while the average expense ratio of commodities energy funds is 0.57%. As of Sept. 30, 2015, it has an average annual return of -7.86% since its inception. Based on trailing three-month data, DBO has an average daily share volume of 320,000.

[Dec 07, 2015] Don't Buy USO (Buy USL Instead)

February 09, 2009 | ETF.com
Investors are pouring money into the United States Oil Fund right now. They must be out of their minds. I have nothing against people wanting to buy oil at $40/barrel. That's a cheap price, and there's reason to believe that spot crude may rise over the next six-to-twelve months. OPEC appears to be sticking by its production cuts, overall supply is down and it feels like the global economy may be leveling off. Oil could easily go to $50/barrel, which would be a 25% jump from here. Where else in today's market are you going to get that kind of return?

But if you want to profit from that rise, USO isn't the way to do it.

This is a big deal. According to the Wall Street Journal, investors poured $3.46 billion in new money into the U.S. Oil Fund (NYSE Arca: USO) in December and January. That makes my hair stand on end, because those investors have gotten crushed. And if things stay the way they are today, they're going to continue to get crushed.

The reason, as I've written about time and time again, is contango. The oil market is in violent contango right now. All else being equal, any strategy that focuses on buying the front-month futures contract and rolling it forward is going to lose money. A lot of money.

This is simple mathematics, and it pains me that people are missing the story.

Here are the current prices for oil contracts with expirations in the next six months. Notice how every contract is more expensive than the one that preceded it. USO follows a simple strategy of buying the current contract and then rolling into the next contract before the current one expires.

March 2009 $40.42
April 2009 $46.22
May 2009 $48.88
June 2009 $50.45
July 2009 $51.28
August 2009 $52.70
Source: NYMEX. Data as of 2/9/08.

Until last Friday, USO owned the March 2009 contract. Specifically, it owned 84,378 March contracts, entitling it to 84.4 million barrels of oil.

But on Friday, it sold all those contracts and bought the April contract instead. But because the April contract cost $6/barrel more than the March contract, it couldn't afford as many contracts. In fact, if you exclude new inflows into the fund, it could only buy 73,444 April contracts.

Whammo presto, the holders of USO lost 13.4% of their exposure to crude oil. They now control less oil. If the spot price stays near $40/barrel, the value of those April contracts will decay back to $40/barrel over the next month and investors will lose their shirts. If the price of oil jumps 15% in the next month-before USO rolls again into the May contract-investors will only break even.

This contango effect killed oil investors in January, according to Standard and Poor's, which runs the most important commodity index in the world.

"The steep contango in the WTI crude oil futures market (when further-out futures trade at a premium) was the primary factor causing the S&P GSCI Crude Oil Index to decline 18.90% in January. The spot price of crude oil dropped 6.55% on the month, but rolling from the February to the March future contacts accounted for most of the remaining 12.35% of the decline in the component index."

Got it? Contango cost you 12% in January. And it's worse now.

What's so horrible about watching people plow their money into an investment that they don't understand is that there are so many nice, viable alternatives out there.

The same company that offers USO offers a great little fund called the U.S. 12-Month Oil Fund (NYSE Arca: USL). Rather than simply holding the near-month futures contract, USL holds equal positions in each of the next 12 months' worth of futures contracts. Spreading out its bets like that helps minimize contango, which tends to be worse in the near-month contract, and gives you more direct exposure to the spot price of crude.

Not surprisingly, over the past three months, USL has outperformed USO by 13%.

[Oct 03, 2015] How the United States Oil Fund ETF Will Use Futures

Apr. 9, 2006 | Seeking Alpha

The United States Oil Fund, LP (NYSEARCA:USO) is the first oil ETF. Its launch is an important event for energy investors and those interested in ETFs. Here's an excerpt from the fund's S-1 SEC filing explaining its use of futures to replicate the price of oil:

What is USOF's Investment Strategy?

In managing USOF's assets the General Partner does not intend to use a technical trading system that issues buy and sell orders. The General Partner does intend to employ a quantitative methodology whereby each time a Creation Basket is purchased, the General Partner will purchase oil interests, such as an Oil Futures Contract for WTI light, sweet crude oil traded on the New York Mercantile Exchange, that have an aggregate face amount that approximates the amount of Treasuries and cash received upon the issuance of one or more Creation Baskets.

As an example, assume that a Creation Basket purchase order is placed on January 2, 2006. If one were to assume USOF's closing NAV per unit for January 2 is $66.79, USOF would receive $6,679,000 for the Creation Basket ($66.79 NAV per unit times 100,000 units, and ignoring the Creation Basket fee of $1,000). Assume that the price of an Oil Futures Contract for WTI light, sweet crude oil on January 3, 2006 is $66,800. Because the price of oil reflected in these Near Month futures contracts on January 3, 2006 is different (in this case, higher) than the price of oil reflected in USOF's NAV calculated as of January 2, 2006 (the day the corresponding Creation Basket was sold), USOF cannot invest the entire purchase amount corresponding to the Creation Basket in futures contracts-i.e., it can only invest in 99 Oil Futures Contracts with an aggregate value of $6,613,200 ($66,800 per contract times 99 contracts). Assuming a margin equal to 10% of the value of the Oil Futures Contracts which would require $661,320 in Treasuries to be deposited as margin with the futures commission merchant through which the contract was purchased, the remainder of the purchase price for the Creation Basket, $6,017,680, would remain invested in cash and Treasuries as determined by the General Partner from time to time based on factors such as potential calls for margin or anticipated redemptions.

The specific Oil Futures Contracts to be purchased will depend on various factors, including a judgment by the General Partner as to the appropriate diversification of USOF's investments in futures contracts with respect to the month of expiration, and the prevailing price volatility of particular contracts. While the General Partner anticipates significant investments in New York Mercantile Exchange Oil Futures Contracts, as USOF reaches certain position limits on the New York Mercantile Exchange, or for other reasons, it will invest in Oil Futures Contracts traded on other exchanges or invest in other Oil Interests such as contracts in the "over-the-counter

How Investors Lose 89 Percent of Gains from Futures Funds -

Bloomberg Business
The pitch was enticing. At a time when the Standard & Poor's 500 Index had suffered a decline of 41 percent in the previous three years, Morgan Stanley was offering its clients the possibility of some relief.

In a prospectus, the New York securities firm invited its customers to put their money into a little-known area of alternative investing called managed futures.

"If you've never diversified your portfolio beyond stocks and bonds, you should know about the powerful argument for managed futures," the bank wrote. "Managed futures may potentially profit at times when traditional markets are experiencing losses."

>

Morgan Stanley presented a chart telling investors that over 23 years, people who put 10 percent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds, Bloomberg Markets magazine will report in its November issue.

Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

No Gain

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.'s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.

The "powerful argument" for managed futures turned out to be good for brokers and fund managers but not so good for investors.

In the $337 billion managed-futures market, return-robbing fees like those are common. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.

Fees: $1.5 Billion

The funds held $13.65 billion of investor money at the end of last year, according to SEC filings. Twenty-nine of those funds left investors with losses.

The $8.3 million loss in Morgan Stanley's Spectrum Technical fund over a decade pales in comparison to an aggregate deficit of $1 billion in 29 Morgan Stanley and Citigroup Inc. managed-futures funds in the four years ended on Dec. 31, the filings show. Those funds charged investors a total of $1.5 billion in fees.

Morgan Stanley and Citigroup merged their funds' management in 2009; Morgan Stanley bought out Citi's share in June.

"The big news here is, the fees are so outlandish, they can actually wipe out all the profits," says Bart Chilton, one of five members of the Commodity Futures Trading Commission. Even though the CFTC oversees managed futures, Chilton says he hadn't been aware of the effects of the high costs for investors.

"We absolutely need to do a better job of letting consumers know in plain English what's going on," he says. "Those numbers tell a story. It's astounding."

Little Noticed

The impact of high fees on investors has escaped the notice not only of regulators, but also some industry executives.

The Morgan Stanley Spectrum Technical fund was opened in 1994 under the leadership of then-Chief Executive Officer Philip Purcell.

He was succeeded in 2005 by John Mack, who had spent most of his career at Morgan Stanley. James Gorman, who replaced Mack in 2009, joined Morgan Stanley from Merrill Lynch & Co. in 2006.

The prospectus pitching the Spectrum fund, issued in March 2003, said the firm would accept investments as low as $2,000 for individual retirement accounts.

Morgan Stanley's chief investment strategist, David Darst, who has written a book on managed futures, declined to comment on his firm's fees. Bank spokeswoman Christine Jockle also declined to comment on the funds referred to in this story.

'Historically High'

"Fees associated with managed-futures funds across the industry have been historically high," Jockle says.

Brokers have an incentive to keep clients in managed-futures funds because they receive commissions annually of up to 4 percent of assets invested, prospectuses show. Investors pay as much as 9 percent in total fees each year, including charges by general partners and fund managers.

People put money into managed futures because their brokers recommend them, says Thomas Schneeweis, a finance professor at the University of Massachusetts Amherst who was a futures-fund manager from 2004 to 2010.

"Everything is marketing," he says. "Getting out there and pushing it. These things are sold, not bought."

Broker pitches that don't clearly tell investors about the drastic effect of fees should be considered fraudulent, says James Cox, a securities law professor at Duke University in Durham, North Carolina.

'License to Steal'

"Otherwise, the pitch is a half-truth," he says. The government is to blame for allowing these products to be offered with inadequate disclosure, Cox says. "I would call it a license to steal," he says.

Because the managed-futures market is opaque and poorly understood, otherwise sophisticated investors often don't realize how pervasive the profit-eating fees are. The firms marketing the funds are at times also left in the dark. The industry refers to the computers programmed with trading algorithms as black boxes.

Some banks say they can't see into the boxes of the traders they hired.

"Particularly given the black box character of many managed-futures strategies, it is virtually impossible for the manager to detect strategy changes," Bank of America Corp.'s Merrill Lynch says in an August 2010 SEC registration for its Systematic Momentum FuturesAccess LLC.

The 7,752 investors in that fund faced losses of $135.3 million, after fees, from 2009 to 2012, according to data from Merrill's SEC filings. Merrill spokesman Bill Haldin declined to comment.

Side Bets

High fees and black boxes are just part of the story. Some funds also allow their managers to make undisclosed side bets by trading ahead of or opposite to the fund's trades.

Chicago-based Grant Park Futures Fund LP, which is marketed by Zurich-based UBS AG, says on page 90 of a 180-page, April 2013 prospectus that David Kavanagh, president of the $660.9 million fund's general partner, may place such personal trades.

"Mr. Kavanagh may even be the other party to a trade entered into by Grant Park," it says.

The Grant Park Futures Fund reported a net investor loss of $68.6 million during the decade ended on Dec. 31, after fees and commissions of $427.7 million. Kavanagh, president of Dearborn Capital Management LLC, which manages Grant Park, didn't respond to requests for comment.

Misleading Numbers

When financial advisers promote managed-futures funds, they often rely on charts produced by a small company in Fairfield, Iowa, called BarclayHedge Ltd. The firm, which has no connection to London-based Barclays Plc, reports a 29-fold gain through 2012 for managed futures overall since 1980. Those numbers can mislead investors.

BarclayHedge doesn't deduct billions of dollars of fees charged by funds. It uses only information volunteered by managed-futures traders. Traders can stop providing data if their system starts to lose money or collapses, says BarclayHedge President Sol Waksman.

The BarclayHedge data, even with its flaws, Waksman says, is the industry benchmark. Investors need to look at more than just his index, he says.

"They've got to accept some of the blame for going into something without any knowledge," he says.

Managed-futures funds are a subset of hedge funds. They're run by so-called commodity-trading advisers, or CTAs, who these days invest largely in financial futures. While hedge funds typically charge a 2 percent management fee and 20 percent of investor profits each year, a managed-futures fund often duns clients 7 to 9 percent of assets invested annually and 20 percent of any profits.

'Ask Questions'

The National Futures Association, a self-regulatory group, doesn't require managers to disclose the effects of fees on investor profits over time, says Mary McHenry, an associate director in the NFA's compliance department.

"We can't just give investors all the answers," she says. "It's important that they ask questions before they invest."

While brokers commonly promote managed futures as protection against stock market declines, the language in prospectuses belies that notion. Managed futures are noncorrelated; that means their performance doesn't track that of any other investments, either positively or negatively.

"As a risk transfer activity, trading in commodity interests has no inherent correlation with any other investment," Grant Park wrote in its February 2013 prospectus. In other words, managed futures behave like a knuckle ball in baseball.

'Don't Know'

Players know a knuckle ball isn't a fastball or a curveball, but beyond that, they don't know what it will do. A managed-futures fund isn't a stock or a bond; it may sometimes behave like one -- and sometimes not.

McHenry says she knows that brokers pitch managed futures as protection from stock market declines -- and that fund risk disclosures say there's no correlation. Asked how those contradictory statements add up, she says, "I don't know how to answer that question."

Like hedge funds, managed-futures funds haven't been required to file with the SEC as a matter of course. However, an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets -- even a hedge fund -- must file quarterly and annual reports.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Bloomberg Markets culled through thousands of filings in several categories, including one called "SIC 6221 Unknown," to identify 63 managed-futures funds that reported to the SEC.

T-Bills

While each trading adviser has a different black box, there are similarities in how fund managers approach their jobs. Some of their investments are plain vanilla. They place money from investors into U.S. Treasury bills or other short-term debt. They then use about 15 percent of the funds to buy or sell futures contracts.

They can bet that prices will rise or fall on more than 150 different futures contracts, including those covering stock indexes, government bonds, currencies, interest rates, agricultural commodities, oil and metals.

Treasury bills turn out to be critical. Interest income from T-bills and other debt investments has effectively masked the high fees funds charge their investors. The 63 funds that reported to the SEC collected interest totaling $2.34 billion in the decade from 2003 to 2012.

Without those gains, the combined 10-year earnings of $1.3 billion after fees in the 63 funds would have been converted to a loss of more than $900 million. As interest rates have fallen to historic lows since 2008, managed-futures funds have suffered their largest declines ever.

More Risk

Fund managers amp up the risk in their investments by using leverage. They can buy futures contracts on margin, with down payments as low as 10 percent. A $100 investment in Morgan Stanley's Spectrum Technical fund, for example, bought $1,000 worth of futures contracts, according to its 2003 prospectus.

By comparison, the New York Stock Exchange requires investors to maintain a minimum margin of 25 percent of the market value of a purchased security.

Even the managed-futures funds that file with the SEC don't have any obligation to disclose how fees in recent years ate up all trading gains.

The Grant Park Futures Fund filed a prospectus in April to raise $927 million from investors. Although it included the boilerplate language saying substantial fees could offset trading profits, the document doesn't say that the $25.6 million the fund had gained since 2009 was obliterated by fees. Investors suffered a $223.6 million loss over that period.

Advisers Confused

Ken Steben, who runs a fund, says managed futures can be confusing to both investors and advisers. His Futures Portfolio Fund, started in 1990, gathered $2 billion from more than 17,000 investors during the decade ended on Dec. 31. The fund has been marketed by 140 firms, including San Francisco-based Wells Fargo & Co. and Minneapolis-based Ameriprise Financial Inc.

It had gross returns of $619.5 million in that decade. Investors paid 86 percent of that amount in fees and commissions, leaving $84.3 million, for a 3.6 percent compounded annual growth rate.

"Most individual investors don't understand what we're doing," says Steben, 58, sitting in the boardroom of his no-frills suburban Steben & Co. office in Rockville, Maryland, in April before the firm moved to Gaithersburg. "In many cases, the financial advisers don't completely understand it."

Individuals Pay

While pension funds, college endowments and other institutions invest in managed futures, individuals bear the brunt of the fees.

Institutions that invested at least $1 million with London-based Winton Capital Management Ltd., one of the world's biggest CTA firms, received a net total of 11.9 percent from 2009 through 2012, the company reports. Winton charges those investors a 1 percent management fee and 20 percent of profits.

Individuals who invested in the Altegris Winton Futures Fund were less fortunate. Altegris Investments Inc., an alternative investment firm in La Jolla, California, allows clients to come in with as little as $10,000. Altegris collects additional annual fees totaling up to 4 percent, according to SEC filings.

Because of that, some of Altegris's Winton investors lost 10.1 percent in the same period institutional investors had gains, SEC filings show.

Altegris Executive Vice President Richard Pfister asks, "Are any of these managed-futures funds worth it anymore at these fee levels? Do they make sense?"

1990s Success

One of the biggest and oldest futures managers, Baltimore-based Campbell & Co., did well for investors in the 1990s and early 2000s. Its flagship Strategic Allocation Fund provided a 10.5 percent compounded annual rate of return to investors in its first decade of trading through Dec. 31, 2003.

What followed wasn't as good. From 2003 to 2012, more than 15,000 investors put a total of $4.5 billion into the fund. Clients were recruited by Merrill Lynch, UBS and other firms. The Strategic Allocation Fund earned $2.43 billion, according to SEC filings.

Those returns shrank to $158.8 million after investors paid fees and expenses of $2.27 billion, equaling 93 percent of the gains. The result was a 0.6 percent compounded annual rate of return for the decade. That compares with 7.1 percent, including dividends, for the S&P 500 during the same period. Campbell closed the fund to new investors in 2008.

'Outdated, Inaccurate'

Like most managed-futures funds, Campbell develops algorithms for its black box. Those systems are flawed, Campbell tells investors in annual reports.

"A previously highly successful model often becomes outdated and inaccurate, sometimes without Campbell & Co. recognizing that fact before substantial losses are incurred," the firm wrote. Keith Campbell, founder and chairman of the firm, declined to comment.

The knuckle ball nature of managed futures can flummox even the professionals. Gerald Corcoran, CEO of Chicago-based R.J. O'Brien & Associates LLC, the largest independent futures broker in the U.S., says he recently lost money investing in managed futures. Corcoran, 58, is a director of the Futures Industry Association.

His $25 million RJO Global Trust managed-futures partnership, pitched to retail investors with as little as $5,000 to invest, fell 35 percent during the four years ended on Dec. 31 after gaining 41 percent in 2008. It charges up to 7.25 percent in annual fees.

'No Question'

"You're going to lose money in managed futures over the course of a period of time. There's no question," Corcoran says. "I mean, I've just experienced it myself."

"I actually would not even encourage most retail investors to be in managed futures," Corcoran continues. "It's on the riskier end of the investment spectrum." He says managed futures serve wealthy investors. "They're an important part of a diversification of a sophisticated portfolio," he says.

Keith Stafford, an accountant who specializes in auditing hedge-fund and managed-futures data, says he and his colleagues are constantly amazed by the poor performance of managed futures for individual investors.

"We look at each other all the time and say, 'Why would anyone invest in this?'" says Stafford, the member in charge of performance analysis at Arthur Bell, Certified Public Accountants, based in Hunt Valley, Maryland. "It's a racket."

The CFTC

While managed-futures funds are relatively new, official trading of futures in the U.S. dates back to 1848 at the Chicago Board of Trade -- which became regulated by the U.S. Department of Agriculture in 1922. The CFTC, formed by an act of Congress in 1974, took on oversight in 1975.

Morgan Stanley was the first firm to allow individual investors to buy into managed-futures partnerships, starting in 1979. Although commodity-trading advisers initially focused on futures tied to physical commodities, such as wheat, corn, oil and gold, most futures trades now cover stock indexes, interest rates or currencies.

Today, CTAs can be based anywhere. Their main assets are computers -- and the people who program them. Bill Dunn, a CTA pioneer, runs Dunn Capital Management LLC from the top floor of a three-story building in Stuart, Florida, alongside the St. Lucie River.

Dunn, 79, who earned a doctorate in theoretical physics from Northwestern University in Evanston, Illinois, in 1966, began trading managed futures for clients in 1974 after a brief career as a consultant to the federal government.

Mainframe Computer

He raised $137,000 from friends and family and used punch cards to build a program to detect profitable market trends and control risk. He purchased processing time on a mainframe computer to run the cards.

High on one wall of Dunn's windowless trading-room floor, hundreds of red and green numbers blink with currency and commodity prices.

The three traders on duty one March afternoon watch the numbers but don't make decisions based on them. They leave that to their black box, which makes trading choices on contracts for 53 investments, including the Australian dollar, U.S. Treasury bonds, interest rates, stock indexes, cocoa, copper, live cattle and crude oil.

The so-called box is actually lodged in six computer servers linked by blue and yellow cables. It automatically collects tick-by-tick trading data on all 53 possible trading choices and runs it through hundreds of different models, asking each whether to buy or sell. Then it makes a decision, which it relays to the human traders.

'Your Orders'

"In minutes, you have your orders for the day," Dunn says.

Dunn doesn't cater to most retail investors; he requires a commitment of at least $100,000. He boasts a 13.2 percent compounded annual rate of return over the past 29 years, after a 25 percent fee taken from profits. He charges no management fee.

"I think investors are very comfortable knowing that if they're having bad times, we're having them as well," says Dunn, who sports a shaved head and neatly trimmed salt-and-pepper goatee. "We're in the same boat."

In a practice more typical of the industry, Morgan Stanley's profits aren't dependent on investors' making money.

The firm's 220,000 clients that purchased the 13 funds started by Morgan Stanley and are included in SEC filings paid a total of $2 billion in fees, commissions and expenses during the decade ended on Dec. 31. (The bank opened four of those funds after 2003.)

13 Funds

Investors lost money in seven of the 13 funds, SEC filings show. Spectrum Technical performed well during its first eight years, starting in November 1994. Its investors received a compounded annual return of 7.9 percent in that period. In the decade ended on Dec. 31, 2012, the fund had no gain. Morgan Stanley closed the fund to new investors in 2008.

The worst of the 13 funds was the Managed Futures Premier BHM Fund, which was started in November 2010. It had a compounded annual return of negative 11.7 percent over two years and two months. Five of the six gainers had compounded annual returns below 1 percent.

The best performer, the Morgan Stanley Smith Barney Spectrum Strategic Fund, had a compounded annual return of 2.1 percent during the decade ended on Dec. 31. By comparison, the Fidelity Money Market Fund gained a compounded annual return of 2.9 percent in the same period.

Morgan Stanley runs its managed-futures funds through a subsidiary, Ceres Managed Futures LLC. That was previously a joint venture with New York-based Citigroup. The two top-performing Citi funds, now managed by Morgan Stanley, were energy-focused investments that returned 14.2 percent and 14.8 percent compounded annually in the decade ended on Dec. 31.

Cautions Investors

Citigroup spokeswoman Shannon Bell declined to comment.

Darst, Morgan Stanley's chief investment strategist, cautions investors about the cost of managed futures in his 2013 book, "Portfolio Investment Opportunities in Managed Futures" (John Wiley & Sons).

Darst, interviewed in April, says investors shouldn't pay more than 2 to 3 percent in annual fees for managed-futures funds. He says even that's steep compared with other investments.

"It's higher," he says. "That's something you've got to be upfront with people about. This is not a bargain-basement kind of thing."

He says investors should ask questions about fees before buying managed futures.

Double, Triple

Most Morgan Stanley funds impose annual fees that are double -- some are triple -- Darst's suggested level. Morgan Stanley funds generally charge 6 to 9 percent of assets in annual fees. Darst declined to answer follow-up questions about his firm's fees.

Even if an investor understands the effect of fees on returns, it's impossible to avoid a potential conflict of interest between investors and fund managers. Such risks are explained deep in prospectuses or SEC filings.

Morgan Stanley cautions that employees of the general partner and trading advisers may buy futures for their own accounts, in competition with investors. Clients will never know, the 2008 Morgan Stanley Spectrum Technical fund prospectus says. That's because those trading records are kept secret from investors.

"As a result, you will not be able to compare the performance of their trading to the performance of the partnership," the prospectus says.

Lowering Fees

Morgan Stanley spokeswoman Jockle says the firm's managed-futures funds performed well during the stock market plunges that began in 2000 and late 2007. The funds overall gained 22.5 percent after fees in 2008. The bank sells only to investors it deems qualified, and it clearly defines risks and fees, she says.

Morgan Stanley is lowering fees for its new funds, she says. She declined to comment about conflicts of interest.

So incomplete are the disclosures for managed-futures funds that investors, referred to as limited partners, sometimes can't even find out the names of the people managing them. BlackRock Inc., the world's biggest money manager, refused to name the CTAs it hired for the BlackRock Global Horizons I partnership, even after the SEC requested that information in 2009.

"We do not believe that disclosure of the trading adviser identities would be material to limited partners," New York-based BlackRock wrote to the agency on Oct. 27, 2009.

The SEC persisted.

"Because your trading advisers manage your assets, it appears that the identity of these persons is material," the SEC wrote back.

Investor Losses

Five weeks later, BlackRock began making the disclosures. The fund lost $10.2 million for investors in the decade ended on Dec. 31, after paying fees, commissions and expenses of $170.3 million.

"We maintain an open disclosure with the fund's accredited investors and regularly provide them with insight into who we are investing with," says BlackRock spokeswoman Jessica Greaney.

The world's largest futures exchange by trading volume entices individual investors to put money into managed futures by painting a glowing picture.

"Over the past few decades, managed futures have consistently outperformed asset classes such as stocks," CME Group Inc., which owns the Chicago Mercantile Exchange, wrote in a brochure.

CME Group, which says the managed-futures market holds $337 billion in assets, points to 2008 as a banner year for managed futures, saying these funds do well during stock market declines.

'Short Selling'

"They employ short-selling and options strategies that allow them to profit in such markets," the CME brochure says.

When the S&P 500 plunged 37 percent in 2008 because of the global financial crisis, BarclayHedge reported a gain of 14 percent in managed futures.

CME, which also owns the Chicago Board of Trade and the New York Mercantile Exchange, omits two key facts from its promotional material. By using BarclayHedge data, CME masks vast extra fees paid by fund investors.

And CME says managed futures outperformed stocks. But from 2003 through 2012, the S&P 500 delivered more than twice the gains of the BarclayHedge CTA Index -- 98.6 percent compared with 47.9 percent.

In a written response to questions from Bloomberg Markets, CME says that although the S&P 500's return was higher, managed futures performed better because they were less volatile. "Outperformance is more than raw returns," it says.

CME Income

Since most such funds don't file results publicly because they have less than 500 investors and CME cites the BarclayHedge index in its brochure, there's no way to independently verify whether managed futures are more or less volatile than stocks.

CME Group makes money from managed-futures trades. CTAs are important to CME's bottom line, says Kelly Brown, a managing director of the exchange operator, who declined to provide exact figures.

"CTAs are kind of the backbone of the exchange," he says.

No matter how good a CTA's track record is, even some of the best can fall from grace quickly. John Henry, 64, the principal owner of the Boston Red Sox and the Liverpool Football Club, opened John W. Henry & Co. in 1980. Henry's Financial and Metals Portfolio earned 19.8 percent compounded annually for the 27 years ended in 2011, when it closed.

Citigroup hired Henry to manage at least four funds. Citi shut down three of those in 2007 after they each plunged more than 44 percent in three years. The fourth, Westport Futures Fund, gained $40.7 million in the decade ended on Dec. 31.

Those earnings were more than erased by $73.8 million of fees. Henry declined to comment.

Investor Misimpressions

In the secretive world of managed futures, managers often keep millions of dollars of investment gains even as their clients suffer losses. And hype by brokers routinely gives investors misimpressions.

One improvement for investors would be a mandate that managers clearly explain in writing how severely fees have consumed returns over time.

"We don't have a requirement where they have to present that information," says the National Futures Association's McHenry. "That would be valuable."

It would also create a quandary for the managed-futures industry. If fund managers and brokers told investors the whole truth, they might lose the very people who make their business so profitable.

Editors: Jonathan Neumann, Gail Roche

[Oct 03, 2015] How the United States Oil Fund ETF Will Use Futures

Oil ETFs ETF.com

Don't Buy USO (Buy USL Instead) Investors Flood Oil ETFs Looking For Bottom

Top 5 Commodity Trades Of 2015

Kotok: Sell XLE, Buy DXJ On Lower Oil

Using Options To Ride A Rebound In XLE

This ETF Is Headed Straight To Zero

2014's Top Alpha ETFs: Leaders & Laggards

Of 5 Top Commodities, Some Are Struggling A Smorgasbord Of Inflation Protection ETFs

A Leveraged ETF Investor's Checklist

The Definitive Oil ETF Guide List of Oil ETFs and More ETF Database

Impact of Contango: Investors must understand that oil ETFs do not offer exposure to spot oil prices; the slope of the futures curve will have a major impact on returns.

Duration Matters: While many of the products look the same on the surface, the nature of the underlying futures contracts can have a major impact on bottom line returns. ETFs that hold front month contracts are very different from those that spread exposure over multiple periods.

Brent vs. WTI: While most investors are familiar with West Texas Intermediate, Brent Crude is perhaps becoming the more relevant oil contract. Accessible through BNO, Brent Crude might be a better way to play oil prices for some investors.

How Oil ETFs Work

At a high level, oil ETFs function just like any other exchange-traded product: they track an underlying index. But unlike traditional equity ETFs that hold a basket of securities comprising the underlying indexes, most oil ETFs achieve exposure in a very different manner. Because physically buying and holding most oil and gas products is prohibitively expensive, oil ETFs instead generally invest in near-term futures contracts on the underlying commodity to gain exposure to prices. While this strategy may track spot prices fairly closely in certain environments, it may be way off in others [see also Brent Crude vs. WTI: The Best Performing Commodity].

If oil prices are in contango (longer term oil contracts are priced higher than near term ones), funds implementing this strategy will be continually rolling forward into more expensive contracts (see a more thorough discussion of this concept here). Other oil ETFs are structures as exchange-traded notes (ETNs), meaning that they actually own either the physical commodities or futures contracts, but are rather senior unsecured debt instruments issued by a financial institution that agrees to pay investors the return on a linked underlying index. The ETN structure reduces tracking error, but introduces investors to counterparty risk.

ETFdb Pro members can view the Energy Bull ETFdb Portfolio ETFdb Pro Members Only, which outlines a strategy for investors who believe energy prices are entering a long term bull market. [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Ticker ETF Inception Expense Ratio
USO United States Oil Fund 04/10/2006 0.45%
BNO United States Brent Oil Fund 06/02/2010 0.75%
DBO DB Oil Fund 01/05/2007 0.50%
OIL S&P GSCI Crude Oil Tot Ret Idx ETN 08/15/2006 0.75%
USL United States 12 Month Oil 12/06/2007 0.60%
OLEM Pure Beta Crude Oil ETN 04/20/2011 0.75%
OLO DB Crude Oil Long ETN 06/16/2008 0.75%
OILZ E-TRACS Oil Futures Contango ETN 06/16/2011 0.85%
CRUD WTI Crude Oil Fund 02/23/2011 1.54%
TWTI Oil Trendpilot ETN 09/15/2011 1.10%

Sign up for the free ETFdb newsletter to get updates on all new ETFs, as well as actionable ideas.

Impact Of Contango On Oil ETFs & ETNs

It is extremely important for investors considering a position in oil ETFs to understand that they will not be getting exposure to spot oil prices, but rather to futures prices–which can vary dramatically from spot prices. Specifically, the slope of the futures curve can have a major impact on bottom line returns, as illustrated by the chart below comparing spot West Texas Intermediate prices with the price of the United States Oil Fund (USO). Though oil prices climbed over the six year period shown, the price of USO declined by almost 50% due to the consistent contango in oil futures markets [see How To Understand Contango].

Tax Consequences: ETF vs. ETN

Another key consideration when evaluating oil exchange-traded products relates to taxes. Though the products highlighted above are generally similar, there are some structural nuances that are worth investigating. Specifically, commodity pools such as USO are technically structured as partnerships. These funds will deliver a K-1 to investors on an annual basis, and will be taxable annually (at a blended rate of about 23%) regardless of whether or not a position is liquidated [see When ETNs Are Better Than ETFs].

ETNs, on the other hand, offer more traditional tax treatment; gains and losses are reported on a Form 1099 only when liquidated, and the taxes incurred will depend on the holding period (i.e., long term gains will be taxes at 15%).

[The ETF screener allows investors to filter by tax form related to each ETF; if you'd like to avoid K-1s, this can be a useful tool]

Inverse and Leveraged Options

As is the case with most commodities, there are a variety of options for investors looking to gain leveraged or inverse exposure to oil prices through ETFs. Note that these funds can often be quite dangerous, so close monitoring and stop-loss orders are a must [see also 25 Ways To Invest In Crude Oil].

Ticker ETF Inverse? Leverage
DNO United States Short Oil Fund Yes -100%
SZO DB Crude Oil Short ETN Yes -200%
UCO Ultra DJ-UBS Crude Oil No 200%
SCO UltraShort DJ-UBS Crude Oil Yes -200%
DTO DB Crude Oil Dble Short ETN Yes -200%
DWTI 3x Inverse Crude ETN Yes -300%
UWTI 3x Long Crude ETN No 300%
FOL 2x Oil Bull/S&P 500 Bear No 200%
Indirect ETF Investment Options

There are some drawbacks to investing "directly" in oil through the ETFs mentioned above. Since these ETFs primarily use futures contracts, they don't always track spot prices closely (in certain environments, there may be significant discrepancies between the return on a basket of futures contracts and the spot price for the underlying asset). Moreover, in certain environments, commodity prices can exhibit extreme volatility making them inappropriate for some investors [see also UNG vs. USO: Decoupling Or Correction?].

For those looking to benefit from increases in oil prices without investing in commodities, there are a variety of energy ETFs that hold stocks of companies engaged in the production and distribution of oil. Broad-based energy funds generally have significant allocations to oil companies (such as Exxon Mobil, Chevron, and ConocoPhillips), as well as providers of drilling and other services to the energy industry (such as Schlumberger).

Ticker ETF Expense Ratio
XLE Energy Select Sector SPDR 0.18%
VDE Energy ETF 0.19%
XOP SPDR S&P Oil & Gas Explor & Product 0.35%
IEO Dow Jones U.S. Oil & Gas Exploration & Production Index Fund 0.48%
PXE Dynamic Energy E&P 0.60%
WCAT TR/J CRB Wildcatters Exploration & Production Equity ETF 0.65%
UNG United States Natural Gas Fund LP 0.60%
UHN United States Heating Oil Fund LP 0.60%
Master Limited Partnerships (MLPs)

MLPs have become quite trendy in recent years as many investors have hopped aboard these assets to gain access to their sky-high yields. Oil-based MLPs are typically involved in the infrastructure of this commodity including pipelines and other means of transporting the fossil fuel. While they are an indirect play, their dividends may be too enticing to pass up.

Ticker ETF Annual Dividend
AMJ Alerian MLP Index ETN 4.86%
AMLP Alerian MLP ETF 4.48%
MLPI E-TRACS Alerian MLP Infrastructure Index 4.81%
MLPN Cushing 30 MLP Index ETN 5.20%
YMLP Yorkville High Income MLP ETF n/a
MLPW E-TRACS Wells Fargo MLP Index 4.91%
MLPY Cushing MLP High Income Index ETN 6.73%
MLPG E-TRACS Alerian Natural Gas MLP Index ETN 5.34%
MLPA MLP ETF n/a
Regulatory Environment

As oil ETFs have grown in size, some regulatory authorities have become concerned that the size of these funds is facilitating speculative behavior and contributing to overall market volatility. Most of the investigation and review on this subject has focused on natural gas futures contracts owned by UNG, but it is likely that any regulations would have an impact on all exchange-traded commodity products that utilize futures contracts to track prices. While the ultimate outcome remains to be seen, the most likely scenario is the implementation of position limits that prohibit a single fund from owning more than a predetermined number of contracts. Depending on the threshold determined, this could prevent commodity funds from expanding further, and may even force some to reduce their positions [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].

Oil ETF Price Movers

In the short term, predicting the factors likely to move the prices of oil ETFs is a daunting task. Given the presence of speculators in oil markets, as well as the impact of market news, short term prices can sometimes experience significant volatility. Over the long term, however, factors that impact oil prices are more clear, and include:

[For more on commodity ETF investing, download 101 ETF Lessons Every Investor Should Learn]

ETFdb Analysts Recommend

For investors looking to make a short-term play on oil prices, the United Stated Oil Fund (USO) or United States Brent Oil Fund (BNO) are your best bets; these products hold short term futures contracts, meaning a greater sensitivity to spot price changes.

For those looking to place a long term bet on crude oil prices, we like CRUD (which is constructed to mitigate the impact of contango) and also OLEM, which has certain tax advantages as an ETN.

[Aug 22, 2015] CommodityHQ.com by Jared Cummans

What is Contango?

Jared Cummans Jun 24, 2015

2015-06-24

When it comes to commodity investing and trading, contango is a dirty word; it has the ability to destroy value in an underlying position with the blink of an eye.

Now that the ETF universe has rapidly expanded and there are a number of complex products offering exposure to the commodities world, contango has become more prevalent than ever. A number of investors have fallen prey to this phenomenon without realizing what it was and how it impacted their holdings.

Contango is simply a part of the commodity world and is not necessarily a bad thing as it can create opportunities for profit [see also Understanding Contango: Natural Gas Example].

The Definition of Contango

By definition, contango is the process whereby near-month futures are cheaper than those expiring further into the future, creating an upward sloping curve for futures prices over time.

The reason behind this is most often attributed to storage costs; storing barrels of oil or bushels of corn isn't cheap, and the costs have to be passed down the line. Some commodities, such as natural gas and crude oil, are known for exhibiting steep contango over time, while others may show very little evidence of it at all.

In some cases, a commodity will present backwardation, the opposite of contango, when near-month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time [see also The Ten Commandments of Commodity Investing].

How It Affects You

Most futures-contract traders will see one of these two phenomena developing before establishing their next position and they will not present a major issue. For traders who like to keep a constant presence in the futures market, contango may force them to sell their contract low and buy the next contract at a higher price, erasing value.

Backwardation can have the opposite effect, instantly creating value (assuming the position will appreciate after purchase). But those looking to avoid contango can simply find a contract further out or hold off on purchasing until prices change. The real issue comes with exchange-traded funds that track commodities, as they present several nuances that allow contango to have deadly consequences.

Currently, there are a number of different styles for using ETFs to invest in commodities, as innovation in the space has sought to avoid this futures-curve issue.

However, the most popular funds by far are first generation products that focus on front-month contracts. Popular funds such as the United States Natural Gas Fund LP (UNG) and the United States Oil Fund (USO), both of which combine for an average daily volume of over 17 million, utilize an automated roll process that will fall prey to contango every time.

The funds will invest in a futures contract for their respective commodity, and at a certain point in the month automatically sell the current contract and buy into the next one. If a futures curve is contangoed, the fund is forced to sell low and buy high, instantly creating losses for investors who may have had no idea what caused them [see also 25 Ways To Invest In Natural Gas].

How You Can Avoid It

The easiest way to avoid contango is to simply be aware of it in the first place. Closely monitoring futures curves will give you a very clear idea of how an investment will behave and if you are in any danger. There are also a number of ETFs that are now dedicated to eradicating the impacts of contango, such as the United States Commodity Index Fund (USCI), which has been dubbed "the contango killer" fund.

There are also a number of inverse commodity products that will profit as a commodity position loses value to the automated futures roll.

At the end of the day, contango is simply a natural part of commodity investing, but if you do your homework you can effectively control it and make it work for you.

[For more commodity ideas sign up for our free CommodityHQ newsletter]

Disclosure: No positions at time of writing.


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The Last but not Least


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Last modified: October, 01, 2017