It looks like the US Oil ETF is going to trade today, finally. There have been plenty of articles on the product over the weekend. Some telling us it is too risky and some explaining the nuts and bolts. I got onto the company's distribution list and you can check out their website here.
So should you buy it? Well, I don't know if you should but here are my thoughts. I have no plans to buy this personally or for clients today or tomorrow. I waited a long time before using GLD for clients. I held on to a miner stock until recently and switched to GLD when I thought the ETF was the better hold. In that time I was able to get a feel for how the ETF traded (this is a squishy thing and not any sort of statistical measure I am talking about).
Right now I am thinking the oil stocks are generally a better hold than the commodity. Oil has had a big move of late, how much is left? Could be a lot but I don't know. However if oil stays where it is, say $65-$70, for a while earnings from the oil companies, as a group, will be fantastic, this might cause stock prices to go up a lot more and dividends to be raised.
Occasionally oil will hit an air pocket and folks nimble enough to trade those moves will find USO to come in very handy.
I can also see where a combo of USO and some oil stocks could be a good way to allocate to this sector but in general terms I don't think owning a new product on day one is necessary, the water ETF (bought on day two) was an exception for me.
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5 comments:
Here's what I don't understand about this kind of ETF: who is it for?
If you're a trader and you want to bet on short-term moves in oil (or any other commodity), get yourself a futures account and do it right. Is it risky? Of course. But as any real trader will tell you, it's not a part-time job. Go hard or go home.
If you're an investor, there are plenty of great oil companies out there that you can buy that will be gushing with cash (sorry, couldn't resist the pun) for years to come.
So that leave us with the USO crowd. Who are they? Do they want to trade oil but they're afraid to buy futures? Are they not patient enough to buy and hold oil stocks? I'm just not sure I understand the utility here...
That's easy.
The USO is for the allocator who has a regular account---no futures which require margin, etc---who will want to hedge their account with HARD ASSETS. There is a huge market for this. Hard assets are those the Government can't make out of thin air, like they can dollars ( stock, bonds, cash ).
Think about it.
g
It's not clear to me what happens with the interest that is earned on the treasury bonds that the fund deposits on margin?
I assume that if the fund(s) retains the earnings then it will pay tax on them. If they decide to distribute a "deemed" dividend (a dividend consisting a tax credit for the tax paid by the fund on your behalf,while at the same time you increase your cost basis in the shares by the amount of retained earnings) then that will confuse investors, and create issues for people with non-tax accounts.
As is, DBC doesn't say anything about cash distributions of investment income other than that they will occur when and if declared. And I assume that USO is the same.
I'm also not sure I understand how the funds handle the constant gain from backwardation (Oil contracts that are due in the current month are worth more than those due in in the future. So there is a constant profit if you buy long term contracts and roll them over)
George is right but cahnces are a lot of people will do it improperly or buy too much, relative to what they need to hedge.
The interest will try to cover the expense as might any bump from backwardation but the complex is has been in contango for a while.
What I mean is that DBC has fund expenses of 1.45% and the underlying treasury bonds have have interest of at least 4.5% or so.
That should imply a dividend of about 0.3% a year (assuming a 10% Margin on the Commodites contracts). If they are using barter swaps to avoid capital gains than the constant oil backwardation will slowly result in an increasing amount of oil in the portfolio which will have to be rebalanced out.
In USO's case it seems like they could pay decent dividends from the backwardation and interest income. Otherwise it would seem that owning IGE is a better way to participate in oil fluctuations.
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