Early on Monday May 25thwe stressed that (NYSE:OIH) (Oil Services HOLDRs) was erroneously being bought by investors as a play on Oil. Besides outlining the reasons that pressure would continue on Oil (strengthening dollar, declining demand, and increasing supply) we stressed that (NYSE:OIH) is a holder, it is made up of drilling companies not crude, and Transocean (NYSE:RIG) and Halliburton (NYSE:HAL) are two of the top four constituents of the (NYSE:OIH) and make up 24% of the (NYSE:OIH). Our concerns are that the (NYSE:OIH) could fall precipitously if (NYSE:RIG) and (NYSE:HAL) are fined in regards to the BP oil spill in the Gulf of Mexico, and that there should be little to no correlation between the (NYSE:OIH) and Crude prices for the foreseeable future.
Well, today is a perfect example. Crude is currently up .05 and OIH is down 6%.
The drillers are getting crushed today on a combination of earnings fears, the delaying of new drilling by the US government and fears that the Gulf spill will result in long term loss of revenues to the drillers. Meanwhile, Oil may be looking at a flat–line or pseudo rally as political intervention causes some supply worry, and Asian demand is said to slightly increase. So while many investors are left scratching their heads at why the OIH is off so much if Oil is up, it illustrates a perfect example of the dangers of not knowing what the constituents of the ETFs are in your portfolio.
ETFs give investors and money managers extreme flexibility in maximizing the sector specific exposure that they own (or short), but you need to do your homework. If you are looking for Oil exposure as a commodity (through ETFs) then you will be buying an ETF that invests in Futures contracts and have contango issues, or you will need to buy an ETF that gives you less than a 1:1 correlation to the barrel price. For exposure to the movement of spot crude, ETF alternatives in the US markets are (NYSE:USL) (U.S. 12 Month Oil Fund) which is an average of the 12 months futures contracts on the spot price of light, sweet crude delivered to Cushing, OK, and (NYSE:USO) (U.S. Oil Fund) which trades more volume from an ADV standpoint and gives you performance based on the spot price of West Texas Intermediate light. On the ETN side, (NYSE:OLO) (PowerShares DB Crude Oil Long) and (NYSE:OIL) (iPath S&P GSCI Crude Oil Total Return) are potential options as well. ProShares also offers daily leveraged exposure in the form of (NYSE:UCO) (ProShares Ultra DJ-AIG Crude Oil). None of these products are perfectly correlated to crude spot so as to track a barrel of oil’s appreciation or depreciation in lockstep, so the portfolio manager and/or investor should investigate these and related products accordingly.
As with all ETFs and ETNs, you should lean on your broker or ETF trading firm to provide you with the information and help you “drill down” to find the ETF that gives you the best exposure to the market you seek.
Oil Services HOLDRs (NYSE:OIH)
United States Oil (NYSE:USO):
United States 12 Month Oil (NYSE:USL)
PowerShares DB Crude Oil Long ETN (NYSE:OLO)
iPath S&P GSCI Crude Oil TR Index ETN (NYSE:OIL)
ProShares Ultra DJ-UBS Crude Oil (NYSE:UCO)
Street One Financial LLC (S1F), is a full service shop specializing in ETF’s, equities, and options. S1F UTILIZES THE BROKER/DEALER SERVICES of Emerging Growth Equities (EGRO), a registered Broker Dealer and member of SIPC/FINRA. S1F specializes in agency ETF/ETP, equities, and options trade execution. On the ETF/ETP end, S1F works with the ETF issuers to understand their products thoroughly and how they can complement an investor’s portfolio. We assist portfolio managers in constructing their portfolios and identifying which ETF provides the best desired exposure by portfolio objective, fees and ease of trading. The ETF/ETP landscape is evolving rapidly and has diversified quickly beyond passive equity index ETFs. Now actively managed strategies, fundamental and quantitative ETFs, as well as those that offer exposure to Fixed Income, Commodities or even Volatility Indexes are available to investors. That said, understanding how specific products work and where they fit within portfolios and perhaps more importantly, “how to trade” these products, has become something of major importance to portfolio managers on all levels. At S1F, we assist portfolio managers in screening by true underlying liquidity, not “shown liquidity” or “perceived liquidity” as reflected by average daily trading volume. S1F then sources liquidity without identity or information slippage, through all available access points in the marketplace to minimize the market impact of the trade, delivering a lower total cost of trading to the portfolio manager. This allows the portfolio manager to, in essence, recapture basis points on each trade, and outperform their competitors over the course of the year, while maintaining a competitive edge over their peers. All trades executed by Street One are cleared and settled with NFS/Fidelity.
This communication is not intended to constitute any offer or solicitation to buy or sell securities. All trading and broker dealer services are through Emerging Growth Equities, Ltd (EGRO), Broker/Dealer and member of SIPC, FINRA (www.egequities.com). For more information, please contact us at: 877-782-8353