The OIL ETF Disappoints Investors as a Crude Tracking Instrument

The exchange traded fund for oil, "iPath S&P GSCI Crude Oil Total Return Index (OIL), " has been a huge disappointment for oil investors who wanted a fund that mirrored the price of oil without having to buy oil futures.

Since the start of 2009, the price of oil has surged 60% while the OIL ETF is essentially flat at only up about 4%!

click to enlarge

On the chart:

• WTIC is "West Texas Intermediate Crude - Continuous Contract"

• OIL is "iPath S&P GSCI Crude Oil Total Return Index"

Over the life of the fund, OIL has underperformed the price of oil considerably.

According to etfconnect.com, the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL):

The Fund is a sub index of the Goldman Sachs Commodity Index. The Index reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate crude oil futures contract.

Not only has OIL underperformed the price of oil, but investors had to pay an expense ratio of 0.75% a year to do so.

Unless you are an investment professional, I do not recommend investing in oil via the futures market. The leverage in futures can quickly wipe you out. With the recent data comparing the OIL ETF with the price of oil, I won't be recommending that as an investment in the price of oil either anytime soon.

Comments

[Gary Gallo:]

Often the case with commodity ETF`s. Ive always said if you want to trade commodities get a futures account. With the only exception a broad based commodities ETF to balance a portfolio.

Jun 12 11:35 AM

[billb123:]

I wonder how long before the ETFs with serious tracking problems are outlawed. This goes for leveraged ETFs and short ETFs as well. Most who are interested enough to look can see the problems, but I've run into too many people who dabble in this stuff casually who give me a puzzled look when I speak of tracking error. When they get wiped out, there will be an uproar, I'm sure. Ignorance of the law is no excuse, so they say, but ignorance of investment vehicles is somehow excusable and brings on legislation.

Jun 12 11:55 AM

[Homer II:]

Interesting...

OIL is the "iPath S&P GSCI Crude Oil Total Return Index ETN"

and I suppose that the acronym GSCI stands for "Goldman Sachs Commodity Index"

Goldman Sachs? Aren't they the investment house which is tightly involved with the White House and the FRB in handling this crisis? All of whom would be desirous of holding the price of oil DOWN.. so they can prop up the "economy"??

Suppose they were tweaking the data going into the computation of the daily value of OIL, the ETF??

I wonder what the chances of that would be? (!!)

Jun 12 10:51 PM

[Marli:]

great stuff

Jun 13 08:23 AM

[prudentinve...:]

You are absolutely correct about the tracking error and you are doing the investing public a favor by highlighting it.

However, although I had been aware of the imperfect correlation between OIL/USO/USL, I have still been able to get very good returns in all three. Firstly, these are short-term vehicles. If oil goes up 50% and these trading vehicles go up by only 40%, the return is not too bad at all. Secondly, these funds usually experience losses each time they roll over contracts. Partnerships pass-through these losses to investors, which reduce the investors' tax burden, especially for those in higher tax brackets.

In summary, despite their imperfect tracking of oil price, these vehicles can provide excellent overall returns during periods of sharply rising oil prices.

Jun 13 09:05 AM

[Kirk Lindstrom:]

"If oil goes up 50% and these trading vehicles go up by only 40%, the return is not too bad at all. "

Yes, but I showed a chart that said oil went up 60% and the ETF OIL only went up 4% this year.

Also, if you took enough risk to buy something that paid off with a $1000 gain and you were only paid $600 while the rest ($400) went to fees, would you be happy? We're led to believe the expenses of the OIL ETF are 0.75%. They don't tell you about the other costs to create the position.

BTW, the expenses to speculate on oil prices may be reasonable. After all you have to store a real position if you don't use futures. For many, this means paying for a tanker to fill and anchor somewhere. But who would do it if you expected a 60% gain and only got 4%?

Jun 13 10:05 AM

[Pearsonpc:]

"You are absolutely correct about the tracking error ..."

Ditto.

Why the tracking error?

Thanks.

Jim

Jun 13 10:22 AM

[tradetime:]

I agree there are issues with all these types of products, but aren't most commentators comparing apples with.....well something other than apples.

You buy an ETF such as OIL, USO, whatever, but then you compare to the spot price of oil, tbk none of these products claim to track the "spot price" (I could be wrong on that ) What I mean is say you want to play the Crude rise pure and simple, ie not buying Exxon or other companies, but crude itself, how do you do it,

a) Buy the physical commodity ie 1000 barrels of oil and lock them in your garage, (not exactly practical)
b) As someone said get a futures account and buy futures, but are you actually, apart from a management fee, any better off, isn't the whole problem the cantango, which will hit you trading futures, just as it hits many of these which are also trading.....futures...

Whilst it is right that authors such as yourself highlight for the inexperienced that these things might not perform the way you expect, in dramatic fashion, the fact remains that comparing them to the change in the spot price between say Jan and June is not really resonable. Even for a futures trader, the only way is to estimate where the price will be x months out and buy that contract, then you will due to the contango be buying it at a higher than spot price.

Jun 13 11:45 AM

[Kalani Martin:]

DXO (and it's inverse, DTO) is by far the best ETF/ETN at tracking crude oil and it's not a coincidence that it's also the best at managing the effects of contango. Review the recent SA article by clicking the link below.

seekingalpha.com/artic...

Jun 13 01:30 PM

[Baboon:]

I am not sure how $WTIC is calculated but if it's based on the spot price as indicated by one of the posters above then definitely you are comparing apples and oranges. If it's not based on the spot price but on the futures contracts then it brings up the question: why is the tracking error?

Jun 13 01:46 PM

[Baboon:]

There another etns I've looked up that are not double: OLO and inverse SZO.


On Jun 13 01:30 PM Kalani Martin wrote:

> DXO (and it's inverse, DTO) is by far the best ETF/ETN at tracking
> crude oil and it's not a coincidence that it's also the best at managing
> the effects of contango. Review the recent SA article by clicking
> the link below.
>
> seekingalpha.com/artic...
>

Jun 13 02:05 PM

[Kirk Lindstrom:]

Good article! I put your symbols all on one page for easy quotes and charts

==> tinyurl.com/OIL-ETFs

On Jun 13 01:30 PM Kalani Martin wrote:
> DXO (and it's inverse, DTO) is by far the best ETF/ETN at tracking crude oil and it's not a coincidence that it's also the best at managing the effects of contango.

Jun 13 02:11 PM

[Fighting Yoda:]

If OIL lags oil by 56% in that case someone should complain to SEC. This is a lot of tracking error, irrespective of whatever fine print they may have on the ETF. Even USO does a very poor job of tracking. Lot of ETFs have flooded the market in the last couple of years, they have no performance history and also the strategies they use are untested. In volatile markets their optimistic assumptions are obviously failing.

Stay away from derivative ETFs – that use contracts etc to simulate the market.

Also the double and double shorts are a complete disaster – never go near them.

Jun 13 08:47 PM