struck black gold Monday with the release of the first U.S.-listed exchange-traded fund designed to track the price of oil.
United States Oil Fund
began trading Monday morning, opening at a price of $68.25, which was the closing price of the May oil futures contract on the
New York Mercantile Exchange
. Victoria Bay Asset Management, an Alameda, Calif., commodity-pool operator, will manage the new fund.
The objective of the USO is to reflect the spot price of West Texas Intermediate light, sweet crude delivered to an Oklahoma-based storage facility. The fund will invest in oil futures contracts traded on the New York Mercantile Exchange or other U.S. and foreign exchanges. It will also hold other interests, such as cash-settled options and forward contracts, in order to gain exposure to the price of oil.
Although the USO is traded on an exchange and can be sold short like an ETF, it is technically structured as a commodity pool, not a mutual fund.
In this way, the fund is reminiscent of the
DB Commodity Index Tracking Fund
, which was launched in February of this year. The DBC offers investors the ability to track the Deutsche Bank Liquid Commodity index, a fairly energy-heavy index in its own right, with crude oil comprising 35% of the fund, followed by 20% heating oil, 12.5% aluminum, 10% gold and 11.25% in both corn and wheat.
In terms of collateral, the DBC is backed by short-term Treasury bills. The yield generated from the fixed-income portion of the fund is used to offset the fund's fees, which are comparatively cheap at 95 basis points.
The USO will also hold Treasuries as collateral, but it carries a lower expense ratio of 50 basis points. Brokerage fees aren't included.
A Golden Gusher?
The boom in prices of commodities like oil and precious metals has caused a stampede among ETF providers desperate to turn hard assets into investor-friendly funds and, more importantly, gain first-mover advantage.
State Street Global Advisors literally struck gold in November 2004 with the introduction of the
streetTracks Gold Shares
exchange-traded fund. The GLD has since exploded to more than $6.1 billion in assets and trades, on average, close to 4.5 million shares a day.
Just to show the opportunity cost of being second to market, the
iShares Comex Gold
ETF, which began trading a few months after the GLD, in January 2005, at last count listed assets of $291 million and trades in the neighborhood of 119,000 shares a day.
Unlike the USO, which holds derivative securities based on oil and not the crude itself, shares of both gold ETFs represent one-tenth the price of an ounce of gold bullion held safely in a vault. Likewise, when the long-awaited silver ETF is finally released, each silver share will represent about 10 ounces of the metal. Silver prices are still hovering near record highs in anticipation of the premiere of a silver exchange-traded fund.
While some analysts warn that the last thing individual investors need to do is start playing with traditionally volatile commodities, others applaud the addition of hard-asset ETFs as important developments in helping investors diversify their holdings through new, more efficient tools.
"Whenever a new product like the oil ETF hits the market, it opens up the door to new and better things," says Stephen Gresham, executive vice president at asset manager Phoenix Investment Partners. "This is an ongoing development in the democratization of the investing world."