Thanks to Greg Newton for finding this article in the WSJ (sub req'd) about the new crude oil ETF that should start trading next week on the Amex.While we have heard much more about the Silver ETF lately but the crude oil ETF, which will trade under ticker USO, will be the second single commodity ETF assuming the Journal has it right.
There will probably be a couple of other single commodity ETFs like copper, nat gas and maybe a soft commodity or two.
The crude oil ETF could be interesting for a couple of reasons beyond the obvious. When GLD (client holding) was first issued it dropped almost 10% in its first couple of months. Perhaps it was a sell the news type of thing for the underlying. Crude has pushed a couple of dollars higher in the last few days so USO might also drop a little. While we are at it, silver has pushed up a lot lately so it could be in for a letdown immediately after the ETF lists before the fundamentals start to matter.
Another aspect of USO that I wonder about is whether the relationship between WTI and Brent might change or, if not, whether USO will have huge swings in short interest as people try to arb the spread between WTI and Brent.
Usually WTI has a higher price than Brent because it is lighter, although very recently Brent was higher. What makes this arb possible is that an ETF tied to Brent has traded in the UK for a while now under ticker OILB.
In general terms, these products, along with the currency products I have been writing about lately should be studied. The goal for most people with something like an oil ETF would be to have better diversification not to bet on a particular outcome.
9 comments:
Roger,
I know the history is short but if you graph XLE and DBC together, you will see that they are very corolated and that DBC might contains too much oil hence the need for more specific commodities ETFs. Just a thought.
Vincent.
you think DBC is heavy in oil? well it is, but the iShares broad commodity ETF that is coming will have even more in energy
But should we be emphasizing the commodities or equities? Should we be buying copper or Phelps dodge?
At the end of the year or 3 years depending on your holding period a pound of copper or a barrel of oil can not grow in quantity only increase in price. Proper equity selection allows growth in capacity production and increase in price.
The commodity can't go to zero but the stock can.
The commodity is free of rising energy costs as well, as it's already in finished form.
Trade them both. The stock prices will rise before the commodity. Trade the phase shift of the cycles IMHO.
Would you like to elaborate on the phase shift of the cycles?
I dunno. Energy stocks already daytrade on the spot price of the commodity. Some of them pay ok dividends.
I've got this theory that there's a bunch of computers in the basements around Wall Street. They short and long baskets of energy stocks on a minute by minute basis based on the movements of the spot price of oil and, to a lesser extent, NG.
On the phase shift, if you look at the price movements as perfect waves in a trading range, the stock price should lead the commodity price, and then the stock price sells off first. Of course in practice it takes a trained eye to pick these out.
As far as Nat Gas, it follows the price trend of oil. When oil is high and gas is low, buy the gas stocks. I bought DVN and GSX. If oil takes a dive it will tend to pull Nat Gas with it.
I think we need more posts about how to time these market plays not just listing more commodities to consider.
thanks for all the chatter
as far as commodities vs equities DaveB is onto something. Some sort of combo is probably a good way to go for people that want exposure for diversification.
For the guy that wants more posts about timing trades, I'm not sure that I'm the guy for that. Occasionally things seem clear to me and I post in those instances but there won't be a whole lot of that.
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