Oil ETFs and ETNs
Unleveraged Oil and Gasoline ETFs and ETNs
- iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)
- PowerShares DB Oil Fund ETF (DBO)
- PowerShares DB Crude Oil Long ETN (OLO)
- United States Gasoline Fund, LP ETF (UGA)
- United States United States Heating Oil Fund, LP ETF (UHN)
- United States Oil Fund, LP ETF (USO)
- United States 12 Month Oil Fund, LP ETF (USL)
Leveraged Long Oil ETFs and ETNs
- ProShares Ultra DJ-AIG Crude Oil ETF (UCO)
Short and Leveraged-short Oil ETFs and ETNs
Natural Gas ETFs and ETNs
Unleveraged Natural Gas ETFs and ETNs
Mixed Oil and Gas ETFs and ETNs
Unleveraged Mixed Oil and Gas ETFs and ETNs
What Are They?
- The unleveraged ETFs (exchange traded funds) attempt to track the price of the commodity by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage (more exposure than the actual cash invested), ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.
- The ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with the price of the commodity. In other words, with the ETN you don’t actually own the commodity, but a promissory note to pay you based on the commodity’s price. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
- The leveraged long ETFs and ETNs provide super-charged exposure to the commodity: if the goes up 3%, the leveraged ETF may rise 6% (and vica versa).
- The short and leveraged-short ETFs and ETNs are a way to bet against the commodity price: if the price falls, the short or leveraged short ETF or ETN rises, and vica versa.
Why & How To Use Them
- Commodities are a separate asset class from stocks and bonds, so they provide extra diversification in a portfolio.
- The case for oil and gas: a hedge against inflation, and a play on economic growth, rising demand and future supply shortages.
- The case against: In contrast to stocks and bonds, commodities are not income generating. So ownership of the ETFs or ETNs is a pure bet on prices. And the expenses charged by the ETF and ETN providers, including the cost of managing the futures, eat away at the underlying value of the fund. Morever, in the past, the price of oil and gas have underperformed the stock and bond markets for extended periods.
What to Look Out For
- Long ETFs that use futures have diverged significantly from the price of the commodities themselves. ETNs, in contrast, track the price of the commodities closely. See the articles in the Further Reading section below.
- There are dramatic differences in structure of the long ETFs and ETNs, even for the same commodity, leading to potential differences in performance and tax treatment.
- Leveraged ETFs and ETNs are far riskier than simple long ETFs and ETNs. Their performance is often not what investors expect – see under Further Reading below.
- ETFs and ETNs are treated differently for taxation purposes. Current opinion is that all gains on ETNs held for longer than one year are treated as long-term capital gains, whereas an investor owning a futures-based ETF is taxed on any capital gains on the underlying futures held by the fund using the taxation convention for futures, ie. at a hybrid rate of 60% long-term, 40% short-term each year on all gains, even if the investor doesn't sell the fund. (Check this carefully with your accountant.)
Further Reading
- The underperformance of futures-based commodity ETFs relative to the actual commodity they are supposed to track, known as tracking error, is discussed in US Oil Fund ETF Fails Investors Consistently (Scott Rothbort). For the case for commodity ETNs over commodity ETFs, see Troubled By ETF Tracking Failures? Try ETNs (Richard Shaw) and Kevin Rich on Commodity ETFs and ETNs (Hard Assets Investor). See also The ETN Market Heats Up With Goldman Launch; More On the Way (Matt Hougan).
- For analysis and discussion of the natural gas ETFs, see: UNL: A Better Natural Gas ETF than UNG? (Michael Johnston), Will the 12 Month Natural Gas ETF Work Better than Standard Bearer UNG? (Invest with an Edge), Natural Gas ETF Is No Long Term Hold (Zman), and Ameristock Funds' New Gas Futures ETF: An Attractive Instrument In So Volatile a Market (Matt Hougan).
- For analysis and discussion of the oil and gasoline ETFs, see: First Gasoline ETF Comes to Market (Murray Coleman), and New ETF Tracks Oil-Prices Across 12 Months (Eli Hoffmann).
- For analysis and discussion of the short (inverse) oil and gas ETFs, see: Short Oil: U.S. Commodity Funds Launches Its First Inverse ETF (Invest with an Edge), and DNO: New Short Oil Fund Compounds Interest Daily (Index Universe).
- Roger Ehrenberg discusses using commodity ETFs to hedge real exposure to oil and gas in Think Carefully Before Macro Hedging Your Life/Work/Oil Exposures.
- For a concise analysis of the different tax issues pertaining to exchange-traded Commodity funds, see Paul Justice's (Morningstar) A Basic Tax Guide for Holders of Commodity ETFs, ETNs and Trusts.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.
