Oil ETFs: Tread Carefully

DBC, a popular ETF that previously tracked a basket of six commodities, restructured its oil-heavy portfolio to avoid hitting regulatory position limits. In addition to adding eight new commodities to its underlying basket, DBC managers diversified oil holdings by reducing the percentage of WTI contracts in the portfolio from 35% to 12.38%.

In an interesting twist, DBC managers added Brent oil contracts to the underlying portfolio - futures that are traded in London and that will not be subject to CFTC regulatory restrictions.

The critical difference between DBC and DBO is size. Currently, the market value of DBO is just $312 million, while the market value of DBC is $3.8 billion. DBC is large enough to cause regulatory concern about market influence, while DBO has not yet reached that crucial size.

An increased interest in oil ETFs, combined with uncertainty about upcoming CFTC regulation, should be reason enough for caution. While the suite of futures-based oil ETFs may not be large enough yet to cause regulatory crackdown, the fate of rapidly expanding ETF peers should make potential investors pause.

It is advisable for all but sophisticated traders to avoid futures-based oil funds until regulatory revisions have been made clear. Those investors who purchase shares in spite of uncertain regulation should keep a close eye on the size of their investments.

-- Written by Don Dion in Williamstown, Mass.

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