ETFs that offer exposure to crude oil typically use futures to gain exposure to crude. Using futures and rolling from one contract to another as it nears expiration eliminates the messy storage problem. Futures returns have three components. First when you fund a futures account, you buy short-term treasury bills (usually 3-month or 6-month) that can be used as collateral for trading futures. Changes in spot prices are the next component and the only one most people consider. Finally there's a roll yield determined by the term structure of the futures contract. When distant contracts are priced less than near contracts (backwardation), you'll realize a positive roll yield and when distant contracts are higher than near contracts (contango), you'll realize a negative roll yield.
If you read the fine print in ETF prospectuses, you can find out what "index" each ETF attempts to track. The United States Oil Fund (USO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) rolls front-month crude futures. The PowerShares DB Oil Fund (DBO), uses a roll-optimized strategy. When it's time to roll, rather than simply rolling to the next month contract, DBO looks at the crude oil term structure and find the contract that will maximize backwardation or minimize contango (as is the case currently). Here are the year-to-date returns for each:
Special Invite to the Floor of the NYSE: Join Skip Raschke, Jill Malandrino and OptionsProfits for exclusive access to the to the NYSE trading floor. Skip and Scott Redler of T3Live will provide informative presentations on trading and the markets in the Exchange's main boardroom. Following the session, we will head to the trading floor for a mock trading session and cocktail reception. This is an amazing opportunity that you will not want to miss!
Tim has a B.S. in math from the University of Texas and a master's in statistics from Columbia University. He currently runs his own CTA after being a futures portfolio manager for several well-known hedge funds. Tim's foundational approach is that statistical trading must be grounded in financial and economic intuition. His writings are an exploration of both markets and quantitative methods.
OptionsProfits For actionable options trade ideas from a team of experts, visit TheStreet's OptionsProfits now.