What Everyone is Missing when they Play the Crude Market

August 23, 2016 The Alts Team 4 Comments  Like
Education, Managed Forex, Markets

ETF’s have revolutionized the investment landscape. It’s given more people access to what used to be unobtainable, more diversification, and at a cheaper price. It’s no surprise ETF’s continue to dominate flows of funds from investors, now with 6,174 ETF listed. But’s here’s the thing. ETFs don’t work for every market and every investment style. Especially in commodity markets. The truth is, as much as we sometimes would like it to, the ETF structure just doesn’t jive with the structure of commodity markets. No market is a better example of why than everyone’s favorite commodity – Crude Oil. Here a brilliant and simple chart from Charlie Bilello – looking at the percentage gain of spot oil vs USO this year.

Spot Price vs USO Crude Oil(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Charlie Bilello

The $3.3 Billion currently invested in $USO are missing out on roughly 26% (Disclaimer: Past performance is not necessarily indicative of future results) — just in the last eight months ! The reality is this chart doesn’t shock us, or anyone familiar with how futures markets work – with contract months, rolls, and so forth.  Why this is happening is because the crude oil market is currently in Contango, meaning that further out futures contract of the oil market are priced higher than the current price, dragging down the ETF performance as they have to constantly move into the higher priced contracts to maintain exposure to the market (see here, and here for further explanation).

But while many people view this as a problem, using it as a way to paint the problems with ETFs – there’s some who view it as an opportunity. Nature abhors a vacuum, some physics teacher told us once – and the investing corollary is speculators love dislocations like this.

We’re thinking of one rather shrewd relative value commodities strategy who looks to profit off exactly this type of scenario, going both long and short Crude Oil in different contract months to take advantage of the differences in pricing on the ‘futures curve’, as they call it. That trader is up 15.40% YTD off the strategy (Disclaimer: Past performance is not necessarily indicative of future results), which looks somewhat similar to the amount of “loss” experienced by $USO investors. As the old poker saying goes, if you can’t spot the sucker at the table, you’re probably it.  The USO “sucker” has been at it for quite a while, without realizing they are the sucker – which is fine by those trading the other side of this unique dislocation.

Learn more about commodity relative value, here.

4 comments

  1. 08/24/16 – Wednesday’s Interest-ing Reads | Compound Interest-ing!
    August 24, 2016

    […] Commodity professionals don’t use the Crude Oil ETF ($USO). (managed-futures-blog.attaincapital) […]

  2. ball trader
    August 29, 2016

    Hey this is interesting.

    I’ll ask if this also applies to the Gold ETF $GLD ? if it does (which the article seems to indicate yes for any ETF linked to commodity futures where contract roll & contango occur), then this makes me newly suspicious when I read some financial article claiming that Stan Druckenmiller loaded up on the GLD ETF. (https://www.thefelderreport.com/2015/08/14/druck-backs-up-the-truck-and-loads-up-on-gold/)

    Now, I am no where near as investment savvy as Druck, but your article makes me wonder why some “investment genius” would do that?

    And since the above linked article was written back on Aug 2015, and assuming Druck would not take on such a large investment for a few days, looking at the performance of GLD since the date of publication, it appears $GLD dipped way down, prior to zooming up to it’s present level (https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=1&chfdeh=0&chdet=1472500800000&chddm=234600&chddi=604800&chls=CandleStick&q=NYSEARCA:GLD&ntsp=1&ei=XHXEV6CzI8G1jAHP8p7YAw)

    Therefore that must have been some large drawdowns before the bubbly was uncorked in Feb 2016. Of course illustrates the falsity that we assume big names know what will happen in the market and they are always doing the “smart” thing.

    As for me, I will hold onto this new information about commodity ETF’s and keep it in my memory. Thanks for sharing.

  4. ball trader
    August 30, 2016

    Thanks I will read those. I like how your website is responsive design and resizes itself when the window is reduced or the text size is enlarged.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

Limitations on RCM Quintile + Star Rankings

The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

Limitations on RCM Quintile + Star Rankings

The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.

See the full terms of use and risk disclaimer here.

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