Test-Driving Some Exchange-Traded Oil Vehicles

By Brad Zigler

As luck would have it, the new MacroShares oil portfolios debuted as crude prices zenithed and arced lower. Well, in reality, they're really the new version of the MacroShares portfolios (see "Gold Vs. Oil"). You'll remember from our previous screeds that MacroShares offers portfolios representing both upside (UOY) and downside (DOY) wagers on the oil market.

Of particular interest to media and investors alike is the DOY downside portfolio. How much better, many wonder, would a long DOY position be compared with a short position in some of the other long-only (confusing, isn't it?) exchange traded vehicles such as the United States Oil Fund (USO), its contango-dampening sibling, the United States 12-Month Oil Fund (USL), the PowerShares DB Oil Fund (DBO) and the iPath S&P GSCI Crude Oil ETN (OIL)?

With a month of MacroShares trading now in our rearview mirror, we can now get a sense of MacroShares' relative performance characteristics.

 

Trading Performance (July 7, 2008 - August 6, 2008)

	Gain/ Loss	Annualized Volatility	Downside Variance	Correlation (NYMEX)
DOY	42.2	78.1	39.7	-75.3
UOY	-23.3	48.1	30.6	89.7
USO	-15.5	39.3	25.1	89.7
USL	-17.9	42.1	25.3	96.7
DBO	-17.6	43.2	25.3	94.9
OIL	-17.0	41.4	24.9	97.9
NYMEX Spot Crude	-16.1	38.9	24.7	--

 

Like the previous iteration of MacroShares oil portfolios, the correlation to NYMEX front-month crude futures is weaker than that exhibited by the other oil-based vehicles. This, however, could be the petroleum version of making lemonade. Using that divergence - ordinarily considered something of a lemon - outsized gains could be obtained using DOY versus short positions in the other securities products (nothing, of course, beat the highly leveraged returns obtainable by shorting futures). Big gain potential, no margin requirement.

Exchange-Traded Oil Vehicles

 

Now THAT's the makings for a good summer's day: A little drive and a little lemonade ... er, crude oil.

Happy driving.

Comments

[bruno12:]

Remembering what happened to DCR (it went to zero) when oil went over 111.00 for 3 consecutive days, I would stay away from these vehicles. The same thing could happen to either one of them if oil makes an extreme move to the upside or downside.

2008 Aug 08 02:06 PM

[Managing Ed...:]

Given the current volatility of spot futures, there's a 2% probability of oil rising above UOY's/DOY's upside trigger of $185 per barrel by year's end. The probability of crude punching through the $15-a-barrel downside threshold in that same time frame is statistically zero.

I'd say those are pretty good odds for a DOY play.

2008 Aug 09 10:31 AM