Top 10 Direct Energy ETFs

NEW YORK ( ETF Digest) -- Tensions in the Middle East and with Iran specifically have boosted prices for crude oil and associated energy products. Increasing global demand for energy, particularly from emerging market countries including China and India, have also put pressure on prices. In the U.S. energy exploration domestically remains politically controversial with warring factions contributing to a lack of any coherent energy policy. This has been self-destructive since alternative energy sources are not yet commercially viable especially as a substitute for gasoline. All this contributes to higher inflation. Commercial and even retail consumers can hedge their daily energy costs and needs by using direct energy ETPs (Exchange Traded Products).

Another consideration causing prices to rise has been central bank easy monetary policies which began in 2008 causing downward pressure on the U.S. dollar. Since most commodities are priced in dollars this puts upward pressure on prices which can become inflationary for all commodity prices, especially energy.

As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator) I know the value of having an allocation to direct energy ETPs. Energy and energy related products are consumed by all of us every day. Whether it's heating your home or filling up the family car with fuel we focus on these costs like a laser. The bottom line no matter your views we all will continue to use these products for a long time to come. When energy prices are rising, it's good to have products like these available if only to hedge rising prices for yourselves. These products do more than add diversification opportunities for any portfolio. Uniquely, ETPs in our list offer unleveraged exposure to these products as opposed to having to trade directly with leveraged futures contracts, complex options and more compliance paperwork complications.

In addition to normal market risks four other risk factors should be considered:

·         The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs--still in limbo.

·         The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and/or Deutsche Bank.

·         Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors.  

·         Since most commodities trade in dollars, the value of the dollar can positively or negatively affect price behavior.

We feature a technical view of conditions from weekly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 22 period simple weekly moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach.

Subscribers to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions. More often than not DeMark signals provide fine-tuning of open positions to capture gains.

For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares, Direxion Shares and Deutsche Bank. Where available these are noted.

 

#10: United States Heating Oil Fund (UHN)

UHN adheres to the company statement as follows:

"The investment objective of UHN is for the changes in percentage terms of its units' net asset value to reflect the changes in percentage terms of the price of heating oil (also known as No. 2 fuel) delivered at the New York harbor as measured by the changes in the price of the futures contract on heating oil traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UHN's expenses."

The fund was launched in April 2008. The expense ratio is .60%. AUM equal $11 million and average daily trading volume is less than 9K shares.  As of mid-March 2012 the YTD return 13.20%. The one year return was 4.08%.

#9: ELEMENTS Rogers International Energy Commodity ETN (RJN)

RJN follows the Rogers International Commodity Index-Energy Total Return which represents the value of a basket of 6 energy commodity futures contracts in the energy sub-index. The fund was launched in October 2007.

The expense ratio is .75%. AUM equal $77 million and average daily trading volume is 115K shares. As of mid-March 2012 the YTD return 7.29%. The one year return was 2.71%.

#8: United States Natural Gas Fund (UNG)

UNG adheres to the company statement as follows:

"The investment objective of UNG is for the changes in percentage terms of the units' net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG's expenses."

 

  The fund was launched in April 2007. The expense ratio is 60%. AUM equal $852 million and average daily trading volume is 7M shares. As of mid-March 2012 the YTD return -28.79%. The one year return was -58.52%.

A 4 for 1 reverse split was effective February 22, 2012.

#7: United States Gasoline Fund (UGA)  

UGA adheres to the company statement as follows:

"The investment objective of UGA is for the changes in percentage terms of its units' net asset value to reflect the changes in percentage terms of the price of gasoline, as measured by the changes in the price of the futures contract on unleaded gasoline traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UGA's expenses."

 

The fund was launched in February 2008. The expense ratio is .60%. AUM equal $1695 million and average daily trading volume is 57K shares. As of mid-March 2012 the YTD return 19.50%. The one year return was 20.17%.

#6: PowerShares Energy Fund (DBE)

DBE follows the DBIQ Optimum Yield Energy Index Excess Return Index which is composed of futures contracts in WTI, Brent Crude Oil, RBOB Gasoline and Natural Gas. The fund was launched in January 2007. The expense ratio is .75%. AUM equal $160 million and averaged daily trading volume is 137K shares. As of mid-March 2012 the YTD return 7.66%. The one year return was .86%.

Data as of First Quarter 2012

DBE Top Ten Holdings & Weightings
  1. WTI Crude Future Jul12: 24.47%
  2. Gasoline RBOB Futures  Dec12: 23.78%
  3. Heating Oil Futures  Jun12: 23.35%
  4. Brent Crude Futures  Mar12: 23.25%
  5. Natural Gas Futures  Oct12: 7.67%

#5: Barclays iPath Crude Oil ETN (OIL)

OIL follows the S&P BSCI Crude Oil Total Return Index which is an unleveraged investment in West Texas Intermediate Crude Oil futures contracts (WTI) plus the interest potentially earned on U.S. Treasury securities used as collateral.

The fund was launched in August 2006. The expense ratio is .75%. AUM equal $677 million and average daily trading volume is 761K shares. As of mid-March 2012 the YTD return 8.12%. The one year return was .44%.

#4: United States Brent Oil Fund (BNO)

BNO adheres to the company statement as follows:

 

"The investment objective of BNO is for the daily changes in percentage terms of its units' net asset value ("NAV") to reflect the daily changes in percentage terms of the spot price of Brent crude oil as measured by the changes in the price of the futures contract on Brent crude oil as traded on the ICE Futures Exchange, less BNO's expenses ." 

The fund was launched in June 2006. The expense ratio is .75%. AUM equal $73 million and average daily trading volume is 67K shares. As of mid-March 2012 the YTD return 18.66%. The one year return was 16.00%.

Why are Brent Oil prices so much higher than WTI? The question is answered well HERE .

#3: PowerShares/DB Oil Fund (DBO)

DBO follows the DBIQ Optimum Yield Crude Oil Index Excess Return which is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and intended to reflect the performance of same.

The fund was launched in January 2005. The expense ratio is .50%. AUM equal $780 million and average daily trading volume is 506K shares.

(Note: DBO trades commission free for customers of TD Ameritrade.) As of mid-March 2012 the YTD return 9.45%. The one year return was .61%.

#2 United States Oil 12 Month Fund (USL)

USL follows a unique layout by spacing futures contracts on West Texas Intermediate Light Sweet Crude (WTI).

"The investment objective of USL is to have the changes in percentage terms of the units' net asset value reflect the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 Futures Contracts on crude oil traded on the New York Mercantile Exchange (the "Benchmark Futures Contracts"), consisting of the near month contract to expire and the contracts for the following eleven months, for a total of 12 consecutive months' contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contracts that are the next month contract to expire and the contracts for the following eleven consecutive months, less USL's expenses. When calculating the daily movement of the average price of the 12 contracts each contract month will be equally weighted."

 

Source: the US Commodity Funds website. In essence this should give smoother performance when contango and backwardation issues are present. The fund was launched in December 2007. The expense ratio is .60%. AUM equal $176 million and average daily trading volume is 50K shares. As of mid-March 2012 the YTD return 9.57%. The one year return was 2.05%.

#1: United States Oil Fund (USO)

USO is sponsored by U.S. Commodity Funds which has a series of energy related ETFs. USO tracks the continuation contract of Light Sweet Crude oil as trading on the New York Mercantile Exchange. Rolling over monthly contracts entails more contango and backwardation risks. Also inherent in these funds is what the CFTC might do with position limits that would force construction changes to the fund and the manner in which they operate.

The fund was launched in April 2006. The expense ratio is .45%. AUM (Assets under Management) equal $1.5 billion and average daily trading volume is 10M shares. As of mid-March 2012 the YTD return 7.66%. The one year return was .86%.

 

We rank the top 10 ETF by our proprietary stars system as outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to support@ETFDigest.com and we'll attempt to satisfy your interest.


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity


Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity


Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

There's a rapidly expanding series of direct commodity ETPs especially when economic and industrial growth or contraction can dramatically affect prices. Naturally since most commodities, including energy, are priced in dollars, the value of the dollar is another key factor to price behavior. We've chosen to feature some ETPs that may be repetitive but clearly have something to offer as well.

Performance variations which may seem quite wide are the result of higher/lower weightings in Brent vs WTI light crude. This has been a unique situation and those ETPs with heavier weightings toward Brent have outperformed.

Natural gas which is in plentiful supply has fallen victim to a variety of issues from fracking to no coherent energy policy in the U.S. In fact, you might say we have a negative energy policy and have for the past 40 years.

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs.

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The ETF Digest has no current positions in the featured ETFs.

 

(Source for data is from ETF sponsors and various ETF data providers)