Be Wary Of These Commodity ETFs (USO, OIL, DBO, DIG, SPY)
On paper, I love socialism, the United Nations and ETFs. On paper, socialism is paradise where we all take equal advantage of each other and enjoy the fruits of the world’s labor for free! The UN is the friendly world-policeman making sure that no one shoplifts or performs acts of mass-genocide, and ETFs are easy, convenient baskets of investments that every day investors can choose from to match their needs.
But in practice, all three are about as bad as it gets. Socialism is responsible for more death and destruction than any other form of government. The UN is an ineffectual collection of world improvers who can’t manage to do the simplest of things right. And ETFs are baskets of investments typically launched at the peak of their popularity, which as we know, is the worst time to buy any investment.
So whenever I see a new commodity ETF coming over the horizon, my first instinct is to short it, if not completely ignore it.
Of course there are exceptions, and for the morbidly curious, I’m putting together a report about the ONLY three commodity ETFs that I like. It will be available sometime in the next week or so. Watch your inboxes.
In the meantime, let’s look at one group of ETFs launched by one firm – most of these are based on commodities.
Below, I’ve posted a table of ETFs launched by Global X Funds.
If you haven’t heard of Global X Funds, that’s because they’re relatively late to the ETF party. They launched their first ETF in 2009.
Year to date, their 13 ETFs have gained .07% on average.
That’s almost exactly in-line with the broad market, which is up 1.04% over the same period, so you can’t fault them there. Unfortunately, you don’t have to pay an expense fee of 0.5% to 0.86% for buying the broad market, like you do with Global X Funds’ ETFs.
The most commonly used broad market ETF is Standard and Poor’s Depositary Receipt (NYSE:SPY). This ETF does one thing: it tracks the S&P 500 index. It’s the easiest, and one of the cheapest ways to buy the stock market. This ETF only charges a .09% expense fee.
Once you subtract out the expense fees, the broad market ETF is beating Global X Funds’ ETFs by a significant margin – because with an average expense fee of .67%, that puts the Global X ETFs into the negative by over half a percentage point.
After SPY’s expense fee, it’s still in the positive by nearly one percent. That doesn’t sound like that much of a big deal, but it’s these small differences that can make or break your portfolio. It’s the difference between losing money and compounding your wealth.
One percent growth every eight months will turn a $1,000 investment into $1,160 in ten years.
But if you’re losing half a percent every eight months, that turns $1,000 into $927.56 after ten years.
Now, I’m not telling you to go out and buy the broad market just yet. My point is that if you want to be invested in commodities, you should be wary of ETFs.
Take a look at this table of four of the most common oil ETFs: US Oil Fund (NYSE:USO), PS Ultra Oil and Gas (NYSE:DIG), iPath S&P GSCI Oil (NYSE:OIL), PS DB MultiSelect Oil (NYSE:DBO). Since January 31, 2007, oil prices rose 37% – but none of these ETFs have managed to keep pace, and only one of them is in the black for that period:
|US Oil Fund||(NYSE:USO)||-26%|
|PS Ultra Oil and Gas||(NYSE:DIG)||-52%|
|iPath S&P GSCI Oil||(NYSE:OIL)||-35%|
|PS DB MultiSelect Oil||(NYSE:DBO)||6%|
It’s not enough to be right on the trend. You have to be right on the specific investment within that trend.
When it comes to ETFs, you’re best bet is to short new ETFs. Yeah, you still have to pay the expense fee, but at least you’re paying that fee for the privilege of making money, not for owning the new hot investment.
If you don’t feel comfortable shorting, then my best recommendation is to avoid ETFs altogether UNLESS you absolutely understand how they work – including whether or not they’re involved in buying futures. And for any investment, make sure you understand the cost structure. Some ETFs charge as much as .9% expense fees – which is a huge fee for a fund that, by definition, is not actively managed.
I know I’m down on the broad market, but there is one sector that appears to be defying expectations.
I’m talking about technology. Right now, tech’s bull market is something of a secret. Most tech companies are trouncing earnings expectations – and why not? America’s top firms for the past two decades have almost always been involved in technology. Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Research recently put together a special report all about his three favorite technology stocks. It’s called “The Secret Economic Recovery, 3 Tech Stocks Leading the Way.”
If you’re interested in learning about three companies that are the current exception to the recession, I invite you to click here to read Ian’s full write-up on these three companies.
Kevin McElroy is a top rated commodity researcher and analyst specialist at Wyatt Investment Research, with a targeted focus on short and long term investment opportunities. He has worked in the investment publishing field for over three years alongside some of the world’s leading commodity traders and analysts. He takes the complex futures and options trading strategies from the floors of the Nymex and the CBOT, uniquely combines them with economic trends and positions his recommendations in a way that any investor, from a straight long-term buy and hold investor to a sophisticated day trader can easily understand, implement, and profit.
Kevin constantly finds unique ways to profit from the “real stuff” like oil, gold, iron, corn – the energy, money, goods and food that the world constantly needs more of. Kevin is the daily editor to Resource Prospector and a contributor to Energy World Profits and Global Commodity Investing.