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