Oil bounced back after its year-to-date low almost dropped to $26 a barrel in February. With prices now hovering around $40, advisors may have a few clients wondering if they still have a chance to benefit from a recovery.

Skeptics, of course, will argue that the rally has run its course. But for those oil bulls who remain optimistic, there are several exchange-traded products to choose from.

Before diving into the different types of crude-oil-focused ETPs, there are several industry terms and statistics that are useful for advisors and clients to know. Along with crude oil prices, typically quoted as either domestically produced West Texas Intermediate or non-domestic Brent, oil news includes references to rig counts, domestic and international production, inventories and imports.

Rig counts record the number of rigs drilling for oil and natural gas in the U.S.; they do not include the number of wells in production. The rig count is a good figure to gauge current and future activity for service providers such as drillers and completion and production firms, including Halliburton and Baker Hughes.


Domestic production is monitored by the U.S. Energy Information Administration. Figures point to a massive surge since the end of 2008, from a 60-year low to an almost all-time high in March 2015. The EIA also produces weekly reports on domestic inventories as well as imports. Inventory figures have shown very high levels recently, as oil producers have struggled to find storage.

Knowing that oil prices, rig counts and production statistics are useful for making informed decisions, the next step for advisors and their clients is deciding whether they want exposure to the commodity or to related equities in oil companies.

Among the 21 ETPs in Lipper’s Commodities Energy Funds category is the $3.8-billion United States Oil Fund (USO), far and away the largest product.

USO’s share price attempts to track the daily changes of WTI by investing in near-term oil futures contracts written for WTI. Many commodity-focused ETPs gain exposure through futures contracts, and USO is no different.

However, futures contracts aren’t the same as simply buying the spot price; price variations occur often, and futures prices are affected not only by the spot price of the underlying commodity but also by demand for that futures contract and other features.

Take, for example, the trading days of Jan. 26 and 27 of this year. On Jan. 26 the WTI spot price was quoted at $29.54/barrel, for a one-day loss of 2.54%. However, the price of USO actually went up 3.67% from the previous day’s close. On Jan. 27 the WTI spot price jumped from $29.54 to $32.32, for a one-day gain of 9.41%. But USO investors saw their net asset value go up only 25 cents for a one-day gain of 2.77%.

It didn’t make much of a difference for investors who held USO over both trading days, because spot prices were up 6.63% and USO was up 6.54%. But it underscored the daily disconnect that may jar unsuspecting investors and helped explain why USO had a total return of -12.34% in January, while WTI spot prices dipped only 9.35%.


Another investment possibility — exchange-traded notes — faces the same complexities of investing in futures but features the added risk of being nothing more than an unsecured debt obligation. That said, Barclays is the obligor for the $609-million iPath S&P GSCI Crude Oil Total Return Index ETN (OIL), and with its assets of nearly $1.9 trillion, investors strongly doubt the bank will be unable to satisfy its obligations to its ETNs anytime soon.

Like USO, OIL also uses oil futures, but looking back over the same two days in January when spot prices were up 6.63% and USO was up 6.54%, OIL was up 9.73%. Its performance over January was also much different — it declined by 16.58%.

So how close do these exchange-traded products mimic spot oil prices? Year-to-date USO has a correlation of 0.91 with spot oil, while OIL comes in at 0.92. Neither seems terribly convincing, considering they rank near the middle of their peers for spot-oil correlation.

The product with the highest correlation, iPath Pure Beta Crude Oil ETN (OLEM), gets closer than any of them, at 0.97. Just like OIL, OLEM is an ETN backed by Barclays, but unlike OIL, OLEM does not roll its futures contracts to the next month on a pre-set schedule. Instead, it can go into any of several different futures contracts with various expiration dates.

Rolling into different contracts at different times may help clients avoid or minimize the negative effects of contango, where the next-month contract is more expensive than the near-month contract at its expiration. Although this seems a better strategy for managing futures contracts, investors haven’t been flocking to OLEM; its $26 million under management is a far cry from the roughly $700 million under OIL. Both products have a 0.75% annual fee rate, but OIL’s five-year head start in the market probably explains much of its wider appeal.

Curiously, one of the higher-correlating products doesn’t buy oil futures or even your typical oil stock. PowerShares WilderHill Progressive Energy Portfolio (PUW) is a portfolio of companies that improve the use of fossil fuels — through such means as alternative energy and emission reduction — and nuclear power. However, it’s also clearly not the typical energy stock portfolio, and its high correlation with oil prices may not last over the longer term. Consider it a solid choice for overweighting clean energy.

ETFs just slightly less correlated to oil that still contain traditional energy company stocks include iShares US Oil Equipment & Services (IEZ) and First Trust Energy AlphaDEX (FXN). IEZ is a market-cap-weighted passive product that tracks the Dow Jones U.S. Select Oil Equipment & Services Index and tends to be concentrated in a few names at the top. It recently had 30% of its portfolio in just two stocks, Schlumberger and Halliburton. Falling rig counts have been impacting all firms in the oil equipment and services industry, but investors have cheered Schlumberger’s decision to shed 26% of its workforce, and its share price has held up the rest of IEZ’s portfolio very well this year.

FXN does things a little differently; it tracks an index called the StrataQuant Energy Index, which ranks stocks in the Russell 1000 based on growth and value factors such as three-month price change and price-to-book value, and rebalances the index each quarter. It doesn’t weight components by market cap as IEZ does but instead uses a proprietary model to derive weightings. For that, investors get something close to an equally weighted portfolio — at least, soon after quarter-end. Both products are roughly the same size — about $200 million — and have been around since 2006 (IEZ) and 2007 (FXN).

But if a tight correlation to oil prices is not so important to clients, it’s tough to ignore industry titans Energy Select Sector SPDR (XLE) and Vanguard Energy Index Fund ETF Shares (VDE). Their correlations with spot oil prices of about 0.94 each this year are better than futures-based products but not as close as those of some smaller peers.  


Longer term, the tiny fees associated with these two — 14 basis points and 10 basis points, respectively — may be more attractive than simply getting closer to a convenient play on spot oil prices, and the unmatched liquidity provided by multi-billion-dollar portfolios may also be attractive.

Unlike XLE, VDE’s holdings aren’t disclosed daily, so following news and company developments is a real challenge. Both products have market-cap-weighted positions across the energy sector, unlike industry-concentrated IEZ and FXN, and therefore more-common names such as Exxon Mobil and Chevron rise to the top.

So how do they compare so far this year? XLE and VDE have run neck-and-neck, while FXN and IEZ have at times advanced ahead of the heavyweights before settling back. Each of the equity products presented here has surpassed the futures-based products for 2016. Despite their distance from the commodity market, equities are beating futures at their own game this year.

Jeff Tjornehoj is head of research in the U.S., Canada and Latin America for Lipper. Follow him on Twitter at @JeffTjornehoj.

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