A reader asked if I knew why the Oil ETF that trades under ticker USO trades at such a big disparity to the price of crude oil. I do not have all the answers but the short answer is the prospectus gives it leeway to fluctuate by X% on a daily basis, you can read the prospectus to see what X is, I don't recall.
I looked at the fund on a superficial basis when it listed and it became clear to me that I would not be able to have a good feel for what the tracking error would do, meaning it could be bigger or smaller during different time periods.
In wanting to introduce commodities, or for that matter currencies as well, to client portfolios I want a relatively simple product that will capture the effect. The allowance for USO to diverge is not my idea of simple. Forming an opinion about what a commodity might do (note I am not saying being right, just forming an opinion) is much easier than forming an opinion AND guessing what a product will do relative to the thing it tracks.
As you look at the chart it is ugly. As I understand it, though the gap has grown larger it could possibly narrow in the future. I'm not saying it will, I have no idea, but gaming this and the actual price of oil too makes this something I have no interest in.
20 comments:
That's a pretty ugly chart all right but, just eyeballing, there seems to be a fairly decent pattern-match (implied correlation) between the ETF and its index so the growing, longer-term gap in return between the two *might* suggest a deeper execution/expense problem rather than, say, an inability to build an asset mix capable of tracking the index per se.
Another object lesson in giving new products, even (or especially) very enticing ones, a bit of time to display behavior before jumping in.
the idea of seasoning is especially relevent here, RW. I don't recall as fact but think it can vary from the daily move by 10% but I may have that wrong, either way it is huge.
I would never get a good feel for it.
It looks like a pedestrian closed-end fund whose management is - relatively - weak. Watching closed-end funds like TY and EQS try to reconcile their discounts for years is what led me to the (nearly) all-ETF portfolio.
Just a thought:
Like the long / short of CEF vs GLD, might there be an arbitrage play here? Short USO and buy OIL? …your own futures construction?
This pricing anomaly also could be due to the high price of rolling over futures contracts that has occurred with the contango in the price curve. If that's the case, the “long” should be Norway’s Statoil to execute an arbitrage.
The published crude oil price is different than what the USO tracks.
The USO tracks Texas oil, not sure where it is traded. The oil prices on CNBC, i believe, track the Brendt as traded in NY. i do not recall all the details, but i am sure they track two different "oil" products on different exchanges.
Use an example, if current month is April, June oil contract usually trades higher than May contract, which is called contango. This situation will persist right to the point that May contract expires. USO has to constantly roll over the contract as time passes. Just a thought, I suspect that the discount has something to do with USO has to roll over future contract each month.
from Yahoo's finance:
"The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified."
notice the "West Texas Intermediate (WTI) light, sweet," reference.
I chose IXC over USO last summer since IXC paid a dividend (It's 1.69% now) and USO didn't, and it had more global diversification. I sold the ETF last month though.
It certainly has a better chart. And when stocks or ETF's have boring charts like this I demand a dividend or I look elsewhere to put my money.
http://finance.yahoo.com/q/bc?s=IXC&t=1y
wow lots of comments.
first a factual item. when you hear the talk about oil on CNBC they are talking about West Texas Int. Crude which trades on the NYMEX.
Brent's trade primarily in the UK and is usually a touch cheaper because it is supposedly a little heavier.
So USO is meant to generally track oil price quoted on CNBC, all the other caveats notwithstanding.
Further if you look at the chart I put on the post you notice I compared it to $WTIC which o course stands for....
There is a Dubai oil that trades much cheaper because it is much heavier.
Venn Data-very interesting idea on the arb play. Further STO (client and personal holding) is insightful it is very UNhedged.
going with an oil ETF (some clients own IXC) is valid of course but is different. FWIW, I don't compare an equity product to a commodity product WRT oil. I view them as much different.
It moves the same as Nymex Crude oil futures and therefore it doesn't really matter what the price inconsistency is.
Earlier last year, when oil was $72, USO was $70 with a discount of $2. A couple of months passed, oil went down to $65 and up to $76. USO followed to $71 with a discount of $5. The discount has consistently widened. I would disagree with the last comment that the price moved with oil and inconsistency didn't matter.
If you use USO to trade oil, you will lose money as discount increases.
anon at 3.26 is close to the mark I think... most of the commodity ETFs are based on futures rather than cash markets. Futures expire regularly, so to keep exposure the manager/index sells the maturing future and rolls into a longer dated one. Sometimes that longer-dated future is cheaper than the maturing one - a source of extra return. Sometimes (including now) it's mroe expensive - an extra cost for maintaining exposure. This (plus management fees etc) helps to explain the difference in performance between the futures-based commodity ETFs and cash commodity prices.
I may be wrong, but I would hazard a guess that rather a lot of new investors in these instruments are not aware of this concept... it means, when the futures price curve slopes sharply higher, that a substantial increase in spot prices is required merely for the investment to break even. Not a happy situation.
Anonymous and Londoner are spot on. Oil has a substantial negative roll carry because of the contango, so an ETF like USO has to pay a buck or two a month just to stay in the game. This phenomenon is not unique to oil, of course. Since the end of 2005, for example, the GSCI spot index has dropped ~6%. The total return index, which accounts for the roll yield across all the relevant commodities, is down 20%.
Can you tell us what "EOD" stands for on your chart? I realize it represents the futures price of crude oil, but what exactly does EOD mean, and where did you get this price?
Does anyone know where on the web you can get a quote for the spot price of West Texas Light Sweet Crude as traded on the NYME?
I'd like to be able to produce a chart with my own data.
thanks.
the chart comes from Yahoo Finance (their new charts). I do not know what EOD means. I would say to go to the NYMEX website.
I cannot find that graph. When I compare in yahoo finance the OIL etn and USO they are exactly equal.
I looked in www.etfconnect.com to see if the difference between USO and its nav price and its the same.
I do not see any divergence. Looks to me that USO tracks correctly.
Can you please exactly say how you got that graph?
the chart compares USO to the futures contract not another ETF.
go to stockcharts.com and compare USO to $WTIC
To those who wanted to know what EOD was it stands for End Of Day which is the daily settlement price of oil at nymex. Since a lot of accounting nowadays is done using mark-to-market methodology, daily account statements take count of this via this EOD number.
http://sec.edgar-online.com/united-states-oil-fund-lp/s-1-securities-registration-statement/2007/01/19/Section6.aspx
Scroll down at the above link for details about how USO intends to track actual oil prices.
Say.. if WTI does goes up 10%..before
the roll dates (6th of each month).
USO will go up 10%-discount?
If you are going to invest in OIL, who is going to pay for storage? There is value in buying OIL now (taking delivery) versus taking delivery N months down the road. Nobody is going to hold the OIL for you. This is not like gold where someone can put it in the safe. There is a price associated with future promises in OIL.
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