The New Face of Oil ETFs

by Jason Neault

MacroMarkets new paired oil ETFs launched last week, replacing the previous oil ETFs (UCR and DCR) that were liquidated in June after reaching their termination triggers. Unlike the popular United States Oil (USO), these paired ETFs hold cash instruments and transfer funds between each other, instead of holding oil futures contracts. The paired ETFs will track the price of crude on the NYMEX, and will transfer funds dollar-for-dollar with the price of crude. The securities will use a “reference price” of $100 crude, and the funds NAV at inception is one quarter of the reference price. The funds have a 95 basis point expense, for essentially holding cash.

This structure is unique because the Oil Up (UOY) and Oil Down (DOY) will have no impact on the oil market. With the United States Oil ETF, the fund must roll into the futures of the upcoming month, and sell off futures of the expiring month to avoid delivery of crude. Sam Masucci, the CEO of MacroMarkets says:

We’re not increasing the trading volume in futures, we’re not storing barrels of oil, we have a passive involvement in the oil market. We’re not affecting the price of oil.

These new offerings will have a liquidation price when oil closes above $185 for three consecutive days.

This unique structure is patented by the company, and is not the only fund they will be offering with this structure. The company has filed with the SEC for paired up and down real estate ETFs, which will track the S&P/Case-Shiller Composite-10 Home Price Index, with a 2x leverage factor. For more detailed information on the paired ETF methodology, visit MacroMarkets website.

Comments

[sbenard:]

Speaking of impact on crude oil prices. Here is a fascinating phenomenon using empirical data from today's crude oil markets about how difficult it is for speculators to affect oil prices, even despite huge sums of money:

globalcapital.blogspot...

Thanks for bring attention to the new Macroshares oil ETFs. I had been eagerly awaiting them.

Deutsche Bank and Proshares also have some new crude oil ETNs. They use long, double long, short, and double short strategies. The symbols are DXO, DTO, SZO, and OLO. Like the Macroshares, they use treasuries to secure oil trades. This adds a slight interest yield to the fund's returns. I prefer this strategy over USO, which simply buys oil futures, and thus, doesn't have the interest yield. However, unlike the Macroshares, they don't have the price constraints that the MS ETFs have. These price constraints were what forced the liquidation of the previous MS ETFs.

2008 Jul 09 02:34 PM

[sbenard:]

One more thing --

The previous Macroshares oil ETFs -- UCR and DCR -- sometimes had a rather poor correlation to the price of crude oil. I wonder if the new ones will work any better. ??

2008 Jul 09 02:38 PM

[phdinsuntan...:]

spot oil price = f( oil stocks , panic)
oil stocks = f(future prices)
future prices = f (oil commercial corps, non commercial traders)
oil commercial corps= f(oil profits)
non commercial traders = f( panic, oil profits)
oil profits = f(spot oil price)
panic = f (bigbro)

2008 Jul 09 03:23 PM