Check Your Oil ETF Lately?

By Brad Zigler

Sometimes it's best to just leave things alone...

With all the market gyrations of the past few days, I thought I'd take dipstick in hand and check the level of the recently launched United States 12-Month Oil Fund (Amex:USL). You'll recall we took an early look at the ETF back in December ("USL Oil ETF: The Early Innings") and found that it was outdoing its older sibling the United States Oil Fund (Amex: USO).

USO is designed to track the price movements of West Texas Intermediate (WTI) crude oil by using the nearby NYMEX futures contract. USL price movements are based upon an equally weighted average of the nearest 12 NYMEX delivery months.

USL was designed to lessen the impact of contango (see "The Battle Against Contango") that ravaged oil index returns in early 2007.

With now more than a month of trading behind it, USL is lagging USO. Last month, after just a couple of weeks, USL had been on track for a 5% premium over USO. Given the novelty of the product, that may not be surprising.

Economic reality, however, eventually trumps novelty. The 7.1% annualized roll yield implied by the nearby NYMEX contracts is now being reflected: USL gained 1.8% to USO's 2.5% appreciation from December 6 through January 15.

Oil Check

This illustrates a form of petro-karma: What goes ‘round comes ‘round. Last year's contango gives way to this year's backwardation. Investors who eagerly awaited USL's emergence from registration may now be second-guessing themselves.

That's nothing, however, compared to the dismay investors in the the PowerShares DB Oil Fund (DBO) must be feeling. DBO investors actually lost money this past month while crude oil rose.

Oil Products Vs. WTI Crude Oil

	USL	USO	OIL	DBO	WTI
Compound Annualized Growth Rate	18.0%	25.7%	23.0%	-7.0%	18.1%
r-Squared	0.88	0.94	0.92	0.71	--
Beta	0.92	1.00	1.02	1.17	--
Alpha	0.01	0.08	0.05	-0.28	--
Sharpe Ratio	0.58	0.79	0.69	-0.34	0.49

Oil Leak?

The PowerShares DB Oil Fund is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Oil Excess Return. Much touting of the benefits of the "smart" roll methodology employed surrounded the launch of this product.

Index composition rules call for rolls to be made into the futures contracts which offer the best implied roll yield of the 13 nearest delivery months. That should maximize the roll benefits in an inverted market. Should, but obviously, hasn't.

And that's worth checking out.

More on this later ...