Is Your Commodity ETF/ETN Influenced By Contango? (UNG, USO, OIL)
“As the appeal of exchange traded funds (ETFs) has magnified, so has that of commodity based ETFs and exchange traded notes (ETNs). One inherent characteristic of many commodity based ETFs and ETNs is contango. Contango arises when the front-month futures contracts are cheaper than second-month futures contracts. To simplify it, it is when the price of a commodity for future delivery is higher than the spot price (the opposite phenomenon occurs as well, and this is known as backwardation),” Kevin Grewal Reports From Smartstops.
Grewal goes on to say, “This affects ETFs and ETNs that are futures based and/or are tracking commodity indexes such as the S&P GSCI and the DJ-AIG indexes, which typically invest their cash in just the front month futures contracts of the commodities they are tracking. The way these ETFs are affected is that contango generates what is known as a negative roll yield. This negative roll yield could potentially eat away at the returns of the ETF and cause tracking errors. Additionally, the wider the spread, or “contango affect”, the higher the potential that the negative roll yield will eat away at the net asset value of the ETF. When markets are in contango, which some argue is a normal price relationship which reflects the costs of carrying the commodity; the relative ETF will underperform its underlying commodity.”
“Some commonly traded ETFs that have been influenced by contango include the US Oil Fund (NYSE:USO), the United States Natural Gas Fun (NYSE:UNG) and the iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSE:OIL). As for (NYSE:USO) and (NYSE:UNG), their investment goals are to follow the percentage change in the price of their respective commodities front month contract and therefore don’t always mimic the performance of their respective underlying index. If investing in these commodity based exchange traded products, utilizing an exit strategy which identifies specific price points at which they could continue to decline in value could help mitigate the risks,” Grewal Reports.
Here are some more details on the 3 commodity ETFs for you to take a look at below:
US Oil Fund (NYSE:USO) See More On Our USO Category: HERE
The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.
United States Natural Gas Fun (NYSE:UNG) See More On Our UNG Category: HERE
The investment seeks to replicate the performance, net of expenses, of natural gas. The trust will invest in futures contracts on natural gas traded on the NYMEX that is the near month contract to expire. It is nondiversified.
iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSE:OIL) See More On Our OIL Category: HERE
The investment is linked to the performance of the Goldman Sachs Crude Oil Return Index and reflects the returns that are potentially available through an unleveraged investment in the futures contacts comprising the index plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. The index is derived from the West Texas Intermediate (WTI) crude oil futures contract traded on the New York Mercantile Exchange. The fund is nondiversified.
Related posts:
- U.S. Commodity Funds Files For United States Asian Commodity Basket Fund ETF
- Commodity Spotlight: Dow Jones-UBS Commodity Index Total Return ETN In Focus (DJCI, USO, UNG, JJC, DBA)
- Commodity ETF Spotlight: GS Connect S&P GSCI Enhanced Commodity ETN In Focus (GSC, DBC, DBA, DJCI, MOO)
- Commodity ETF Spotlight: GreenHaven’s Continuous Commodity Index Fund In Focus (GCC)
- Commodity Spotlight: Dow Jones-UBS Commodity Index Total Return ETN In Focus (DJP, USO, DBA, DBC, DBO)
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