Friday, January 22, 2010

The Crude Oil ETFs Stink!

A Norwegian oil rig collapses into the sea, just like the collapse of your oil ETF

In prior posts we have shown how, with commodity based ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes), the performance can vary among the precious metals funds and why the levered and inverse funds suffer huge performance drag.  There seems to be great interest in the various oil based funds so we wanted to examine how their performance compares with the spot price of crude oil itself.

There are five funds available to US investors that are meant to track the price of crude oil:

USO - United States Oil Fund (ETF)
USL - United States 12 Month Oil Fund (ETN)
OIL - iPath Crude Oil (ETN)
DBO - PowerShares DB Crude Oil (ETF)
OLO - PowerShares DB Crude Oil (ETN)

Let's compare the performance of these five funds versus the spot price over varying time periods.  For our historical crude oil price data we used the Cushing, OK WTI Spot Price from the US Energy Information Administration website.  The first row shows the futures price and the next five rows show each fund.  The final column, tracking error, shows the difference between the change in value of the spot price and the change in value of the price of each fund.

Over the last three months, the tracking error for DBO and OLO have been respectable, at less than 2%.  USL is the third best with a tracking error of 2.28%.  USO and OIL both have pretty significant tracking errors for this short of a time span, at 4.6% and 5.02% respectively.

Moving out to a one year time span, our tracking error order stays the same as before, with DBO and OLO having the best performance, followed by USL, USO and OIL.  With that being said, the tracking error for all five funds is just atrocious.

Moving out further to a 1.5 year time span, we have the same performance order as before.  This time, DBO and OLO really separate themselves from the other funds.  USL is a bit farther behind while USO and OIL suffer terrible performance.  We chose this time frame because it matches the inception of OLO.

With our time span stretched back to just under 2 years, we can see that DBO significantly outperforms the other funds.  We chose this time frame because it begins at the inception of USL.  OLO was left off of this list because it does not have performance numbers that stetch back this far.

What do these results tell us?  The tracking error for all five funds is significant and can vary greatly depending on the sampled period.  DBO and OLO are by far the best choices for investors and the only ones we would recommend if one simply has to own an oil ETF or ETN.  USL is a bit worse over all time periods so we see no reason to choose this fund.  USO and OIL have simply horrific tracking errors over all sampled periods and are borderline criminal in our opinion.

To go along with this post, we have updated our Commodity ETFs and ETNs Google Docs Spreadsheet.  This is our list of commodity funds that seek to track the performance of specified commodities. We have excluded 2x and other levered funds because we think they are lousy investments and borderline scams.  Since our last update of this document back in October, we have removed UOY, the MacroShares $100 Oil ETF, because it has been delisted.  We have added OLO, the PowerShares DB Crude Oil ETN, and have also updated the average daily volume information for all funds.

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