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It is interesting to note that commodities, gold, oil and of all things, Mid Cap or extended market ETFs are the leaders for the year to date. So much for commodities being hammered.
As at May 31st, 2011:
Being one of the first writers in the financial blogosphere to start talking about the US Brent Oil ETF (BNO), I am gratified to report that since I first took my position on February 17th, I am sitting on a profit of 11.26%. Oil has been generally good to me as my Powershares DB Oil Fund (DBO) has garnered me 26.05% since I opened that long position on September 30th.
I don’t trade my oil positions frequently as, being much of what I call a Jim Rogers frame of mind I just don’t see much downside to holding oil on an intermediate to long-term basis. Does anyone really think oil is going to become substantially cheaper? I don’t. Emerging markets demand for power, geopolitical turmoil, inflation, reduced supplies — I just don’t see the price going down. Will I protect profits in the short term? You bet. That’s why there are trailing stops, which can be adjusted in response to changes in the market. However, for the most part, all of my portfolios will generally have a significant long position in oil ETFs.
I still feel very bullish about Brent oil, particularly as supplies of Libyan oil, also a “high quality” crude, become temporarily intermittent or non-existent. The Saudis can make up the volume but they can’t make up the quality. And, so long as Cushing, OK stays awash in oil — the only thing in short supply around there are empty oil storage tanks — I don’t see Texas overtaking Brent any time soon.
Let’s take a look at some charts to see how BNO has stacked, and stacks up against its competition. I am using DBO, the 2X leveraged UCO and the absolutely disgusting US Oil Fund, USO.
And speaking of USO, it was, I believe, Aleksandr Solzhenitsyn who reported that in the old Soviet Gulags, some prisoners would become so filled with despair that they would lower their heads and run at the walls of their cells in the hope of killing themselves. This is how it must feel to hold USO, which, being generally so contango-bound that it can’t even keep up with the underlying price of oil, is an absolute waste of portfolio space. The irony of the fact that BNO and USO both hail from the same ETF stable — US Commodity Funds — is not lost on me. Their 12-month oil, USL, would be my preference over USO, any day. But I still like BNO and DBO better.
Anyway, to the charts! Starting with the 12-month:
It really isn’t close. BNO beats all, and it only came on the market in the middle of last year. OK, so how about 6 months?:
Here the double-leveraged UCO tops BNO, but at the expense of much higher volatility. And, let’s not forget that leveraged ETFs are not really the best choice for a long term holding. There isn’t a lot of difference in return at the end of the day. How does 3 months look?
Interesting. If you made your investment three months ago, BNO handily trounces everything. 1 month? Roughly a week after I went long BNO, FWIW:
UCO has it, but by Jingo, there is some volatility, isn’t there? Interesting here that USO made a comeback in the 1-month timeframe. And how about 10-day?
BNO is the only ETF to finish in the black in the 10-day oil derby.
So, will the West Texas-based oil ETFs regain their long-term position and top Brent? Maybe, but certainly for the remainder of 2011 if you are long oil ETFs then I think you will be doing yourself a significant disservice if you don’t have a significant position in BNO. I believe the broader investment market has also become more aware of BNO, so, with greater volumes entering those contracts, I think it will take Texas longer to regain its oil ETF crown, if it ever does.
It is funny that since Libya flared up, all of a sudden everyone and his brother has finally discovered the Brent Oil ETF BNO. If I recall correctly we introduced you to it on Valentine’s Day. No worries though, we’re just glad BNO is getting the press it deserves. ETF Daily News has a good Brent versus WTI piece today. You can read it HERE.
The BNO:DBO gap re-established itself today. Shortly before the close BNO is up 5.13%; DBO 3.27%
DISCLOSURE: Long BNO and DBO. (and happy to be so)
In a recent poll on market direction I voted “neutral”. I said my outlook was bullish through the end of QE2 — say mid-year 2011 but that some of the signals I follow were pointing to a bit of potential frothiness. Would the bulls pull through or would the market shake off a few fleas? Well, I was right to be cautious, so it seems, but I wasn’t expecting to have Col. Gaddafi to thanks for it.
Whether he is a cause or an excuse, doesn’t matter. The talking heads are all blaming him so that’s the way we’ll go with it. Unless this whole disturbance in Arabia just causes a Global meltdown, which it yet might, although I doubt it, our well-picked equities and ETFs will recover. Let’s take a look at some commodities, which are interesting.
Gold and Silver both had a way better day on Monday than they did today, as evidenced in Kitco’s charts:
I do not see the “flight to safety” that a lot of the talking heads tell us about. we will see where this leads tomorrow but at this particular moment it isn’t looking like up. Hmmm…
Oil, of course, is doing a brisk trade. As I introduced Brent Crude into my portfolio last week in the shape of ETF BNO, and already have decent holdings in WTI crude through ETF DBO, I am happy. On a long term basis oil is not getting any cheaper, so go figure…. WTI continues to claw back some of the gap between it and Brent but as they are both going up, I’m happy. But notice neither of them gained during the day after the gap up.
Grains took the Libyan situation hard. My favorite grains ETF JJG took a hammering, down nearly 6% on the day reflecting the fact that corn, wheat and soybeans all were limit down today. I will be watching the grains markets very carefully for some buying opportunities as although events in North Africa may cause some temporary decline in demand these poor people still require to be fed. So, we could do well on this drop.
Tomorrow will be an interesting day. The key commodities are not signalling to me the accumulation of fear purchases during the day that I might have expected.
DISCLOSURE: Long DBO, BNO, IAU, SIVR, JJG
It is my opinion that there is really only one, maybe two oil ETFs out there that are worth considering. The main player is Power Shares DB Oil Fund (DBO). The only other ETF worth considering is United States 12-Month Oil ETF (USL). On a five-year viewpoint both beat the pants off the ubiquitous United States Oil Fund (USO). The ETN OIL also trails, closely matching USO:
What has really nailed USO over the last few years is contango. It concentrates its oil futures purchases into the next available month — and it’s only one month, April 2011 as I write – you can see the contracts on their website. USL, run by the same managers, but having futures spread out over a year, largely avoids contango and, as you can see, does much better than USO. However, DBO, which uses a formula to minimize “roll risk” — or maybe just gives its managers more leeway, has done the best job over five years. I have spent quite a bit of time rooting around trying to find out which contracts DBO holds, but have never been able to. I’m sure it’s out there somewhere, I’ve just never found it. DBO also tracks its base index pretty well, too.
However, DBO may soon face some serious competition in the “contango advantaged” oil ETF stakes. I checked with them today, and the folk at Teucrium (home of CORN) tell me that their oil ETF, Teucrium WTI Cryde Oil Fud (CRUD) should come to market within a month. Why is this of interest? Well Teucrium describes ghow they will spread their futures very clearly:
“The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for futures contracts for WTI crude oil, also known as Texas Light Sweet Crude Oil (“WTI Oil Futures Contracts”) traded on the NYMEX, specifically, (1) the nearest to spot June or December Oil Futures Contract, weighted 35%; (2) the June or December WTI Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the December WTI Oil Futures Contract that immediately follows the aforementioned (2), weighted 35%; less the Fund’s expenses.”
So, CRUD should also insulate itself pretty well from contango, which, as we can see from USO’s lagging performance, can and has done a number on results. Whether the oil market will stay in contango for ever we might discuss, but I don’t see it changing any time soon. Continue reading
I never thought Al Jazeera or Wikileaks would be a source for this blog, but if you are interested in the energy markets, you should watch this video:
Oil is commodity product whose price is almost solely determined by supply and demand and perceptions of events that could impact oil’s supply and demand. While in the short term there is current commentary that oil prices may fall some, a reasonable person might conclude that ultimately, oil prices are going higher. Jim Rogers has recently opined that oil could reach between $150 – $200 a barrel.
My preferred ETF that invests in oil futures is PowerShares DB oil fund (DBO). If you would like a more contango-proof oil ETF that stretches its futures contracts forward over a rolling year, I suggest you take a look at United States 12-Month Oil fund LP (USL). Its management fees top 1%, which I consider spendy, but it does stretch its contracts out over a year. You’ll see USL slightly bests DBO over a year. Contango probably has something to do with this, as DBO also falls short of the index it is trying to track.
If you would rather mix some stocks with commodity holdings, then iShares Dow Jones US Oil Equipment & Services ETF (IEZ) is relatively well diversified and very liquid.
While I am personally hard-pressed to see a long-term downside to oil and energy investments it is worth pointing out that some commentators are calling a market top for the time being. Chose accordingly.
DISCLOSURE: Long DBO
