Oil ETF Information and Comparisons

On April 10, 2006 USO was created ushering in a new era of oil and energy investment as well as speculation. The purpose of the Oil ETF was to effectively track the price performance of West Texas Intermediate Light Sweet Crude Oil. Since this oil ETF traded the same as a traditional stock, it allowed allowed billions of dollars in retirement accounts and pensions to invest in crude oil for the first time. Many blame the extreme run up of Crude Oil in 2008 to a record $145 per barrel on speculators and investors who were aggressively buying USO.

USO - United States Oil Fund, LP ETF is designed to track the performance (minus expenses) of WTI Light Sweet Crude Oil. It does this primarily through the use of futures contracts but may also use other financial derivatives such as options on futures, forward contracts or swaps. As investors purchase or sell USO shares the fund purchases or sellsl futures contracts that day to keep proper exposure. USO invests primarily in NYM Futures that tracks WTI Crude but they also have part of their position in the ICE WTI futures. USO uses the front month for 100% of it's exposure and rolls the position forward each month over a 4 day period. Over the past few years crude oil futures markets have spent much of the time in contango and this has caused the under-performance in USO. In contango the front month futures is lower than the longer dated contract. USO sells it's front month futures and then has to purchase the next contract at a higher price which causes USO to underperform the cash market.

USO remains the most active oil ETF trading nearly 10 million shares per day and assets approaching $2 Billion.

The annual expense ratio is .78% (78 basis points) which appears to be about normal for the category.

The charts below illustrate the contango issue we discussed above. This 9 Month chart shows that in the short run USO does a pretty good job of tracking crude oil futures. The green bars represent USO and the black bars represent WTI Crude Oil Futures.

Looking at a long term weekly chart you can see that USO (represented by the green bars) was accurately tracking the WTI Crude Cash market during the boom and bust but performance is sagging on the right side of the chart. That underperformance is caused by the effects of having to roll futures forward and losing the spread as you roll them. Strong bull markets tend to exhibit backwardation in the futures but contango is common under more normal market conditions.

USO VS WTI Cash Crude Oil  -  3 Yr Weekly Chart

Chart begins on the first trading day for USO

OIL - iPath S&P GSCI Crude Oil TR Index ETN is an ETN instead of an ETF but as USO uses futures contracts as the primary investment method for tracking the performance of WTI crude. Therefore the performance curve for OIL is very similar to that of USO.

The annual expense ratio is .75% (75 Basis Points) which is a few basis points lower than USO. However, the trading volume is only about 1/20th of USO.

OIL Performance Since Inception VS USO

Chart begins on the first trading day for OIL

Looking at the last year couple years it appears that OIL has underperformed USO so there is no apparent advantage compared to USO. This underperformance is causing ETF creators and managers to search for other ways create ETFs or ETNs that are more effective at tracking cash markets.

DBO - PowerShares DB Oil Fund is designed to track the Deutsche Bank Liquid Commodity Index by again using futures contracts. However, based on a recent CNBC interview with the Ben Fulton managing director of Invesco PowerShares they have made changes to improve the performance of this futures based fund.  This has included looking for the most advantageous contract to roll the position into instead of simply rolling to the next month's contract.  When you look at the performance chart below you can see this approach has yielded results in the past two years.

Net assets have grown slightly but it remains the 3rd most active oil ETF/ETN with net assets of just under $600 million and daily trading volume of about 435,000 shares per day.

Annual management fee is .75% (75 Basis Points) and the futures expense is estimated at .04% (4 Basis Points) so it is a point higher than USO but has been a better performing fund.

As you can see by the chart below, DBO underperformed USO during the manic phase of the oil rally but has outperformed ever since the highs were reached.  The approach of selecting the most advantageous contract when rolling helps more when the markets are in choppy or sideways moves.

DBO Price Performance Since Inception VS USO

 
Chart begins the first trading date of DBO 

USL - United States 12 Month Oil ETF seeks to replicate the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the NYMEX.   USL began trading on 12/06/2007.

This fund holds the next 12 futures contracts simultaneously with equal weightings in each. Therefore as a contract expires only 1/12th of the futures position is subject to roll and that 1/12th will be purchased in the 12th out contract. For example when October 2010 crude oil reaches expiration the position will be sold and an equal position will be purchased in October 2011.

The problem may be mitigated somewhat by using this method but right now you would be selling October 2010 futures at $73.52 and purchasing October 2011 futures at $81.83 so that's equivalent to an 11.3% rise in the cash market over the next year. Considering this I was pleasantly surprised to see that this approach did yield significantly better results.

Like DBO the net assets and trading volume of USL has remained a small fraction of USO despite the fact that this methodology produces better returns under normal market conditions. It still has plenty of liquidity for investing or trading but is a fraction of USO which is kind of puzzling when you look at the performance.

The annual expense ratio has been reduced to .60% (60 Basis Points) significantly lower than the others.

USL Price Performance Since Inception VS USO

Chart begins on USL first trading day

The following chart shows that USL and DBO have performed almost identically since USL started trading.

You can see that even though USL significantly outperformed USO since the bottom it still has significant under performance relative to the WTI Cash Crude Market. As long as you are using a "Long Futures" approach to replicate ownership of crude oil it will be impossible not to underperform cash crude due to rolling contracts month after month.

USL VS Cash Crude Oil (WTI) Since Inception

As you can see even though the performance of USL is better than USO it still can't match the performance of the cash crude market when the market is in contango.  According to industry experts however there is no cost effective solution that would allow them to create a Physical Oil ETF that would more effectively track cash crude prices.

 
USO | OIL | DBO | USL