Sizing Up 5 Ugly Oil ETFs

The correlation between SPY and crude isn't particularly high, but alternative explanations for the stock market sell-off are hard to come by

by Adam Warner

Published on Jan 21, 2016 at 10:04 AM
Updated on Jun 24, 2020 at 10:16 AM

News flash: It's been an incredibly ugly stretch for oil exchange-traded funds (ETFs). Seeing as we seem to be following crude point for point these days, I figured it was time to see if we're actually following it as much as it seems. And if so, which ETF looks the least bad.

We'll look at five oil ETFs. They are the United States Oil Fund LP (USO), iPath S&P GSCI Crude Oil Total Return (OIL), PowerShares DB Oil Fund ETF (DBO), United States 12-Month Oil Fund (USL) and DB Crude Oil Long ETN (OLO).

They're all slightly different, but the basics are similar. Specifically, they track crude futures in some way, and as such, often do not work as buy-and-hold vehicles. None are leveraged. And it looks ... rather ugly:

160121agw1

What if we narrow it down to the last two years and just look at them vs. their closing price since the end of 2013?

160121agw2


There's not really much difference between them, so why bother listing them all? (Cough ... fees ... cough)

Well, for what it's worth, OLO has done the least badly of the bunch. It still maintains 39% of its end-of-2013 value! Wahoo! What's their secret?

"OLO is a passive ETN that seeks to replicate Deutsche Bank Liquid Commodity Index-Oil. The index is designed to reflect the performance of certain crude oil futures contracts plus the returns from investing in 3 month United States Treasury Bills."


I have to be honest. I'm not sure how that differs so much from USO:

"Tracks changes in the price of light, sweet crude oil, as measured by the changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange."

Perhaps the specific mix is different. I'm pretty sure adding three-month T bills isn't goosing returns much. And if it's just the specific mix, I'm not prepared to say that's going to predict anything in the way of future outperformance.

Then there's that pesky liquidity issue. USO has $2,152,215,000 in "assets" (the float as of Tuesday) vs. $9,193,400 in OLO. So we're going to just stick with USO here.

Our mass media obsession with crude is new, but our level of correlation actually isn't new. In fact, it's not even high. Here's a look at the 20-day rolling correlation and sensitivity (the best-fit line estimate) between one-day changes in USO and the SPDR S&P 500 ETF Trust (SPY) since the start of USO in April 2006:

160121agw3


The correlation over the course of time is 0.42, but since 2013, it's only 0.29. Visually, it looks more or less the same since 2009, save for some blips here and there.

The difference now, of course, is that crude is crashing. It's sure tough to come up with any reason why the overall market carnage will stop until crude stops.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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