Wikinvest Wire

Energy ETFs and ETNs in 2009

Tuesday, January 12, 2010

The success of investors who plowed money into energy ETFs and ETNs last year was highly dependent upon which investment vehicles they chose, a point that should be clear after looking at the right-most column in the graphic below.

For example, an investment in a crude oil-only offering on December 31st, 2008 would have resulted in gains anywhere from 11 percent to 43 percent, however, both of these trail the 78 percent gain of the underlying commodity in what must have been an unpleasant surprise for at least a few investors who compared the two at year-end.

IMAGE [Note: The table above includes energy ETFs/ETNs that were available on Dec. 31st, 2008 and does
not include any dividends paid unless reflected in the "Adjusted Closing Price" at Yahoo! Finance.]

Predictable roll periods (i.e., when a fund manager replaces expiring futures contracts) combined with a wicked contango (i.e., when the purchase of new futures contracts costs more than the expiring ones can be sold for) to severely hamper investment returns for all energy ETFs, however, some were affected far more than others.

For crude oil, the PowerShares crew seem to have things figured out via their flexible futures contract replacement strategy for both the PowerShares DB Oil ETF (NYSEArca:DBO) and the PowerShares DB Energy ETF (NYSEArca:DBE) that gained 42.9 percent and 30.4 percent, respectively. Other funds weren't half as good ... literally.

It was even worse for those who ventured into the natural gas market through either of the natural gas-only offerings.

Even though the price of natural gas futures declined less than one percent last year, the United States Natural Gas ETF (NYSEArca:UNG) ended the year down 56.5 percent and the iPath ETN wasn't much better.

Gasoline was clearly the place to be last year as the underlying commodity rose 93.3 percent while the United States Gasoline ETF (NYSEArca:UGA) - the only gasoline-only ETF available -gained an impressive 88 percent.

Three ETFs from the table were shut down in 2009, the paired MacroShares funds along with the wildly popular PowerShares Crude Oil Double Long ETN (NYSEArca:DXO) that was the victim of a "regulatory event" related to the new found zeal of the CFTC (CommodityFutures Trading Commission) at regulating commodity markets.

Overall, it was a good year for energy prices, but not nearly as good for energy investments.

Full Disclosure - No position in any of the ETFs/ETNs above

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To learn more about investing in natural resources using commonly traded ETFs,
stocks, and mutual funds, see this description at Iacono Research.
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2 comments:

Anonymous said...

Can this underperformance of ETFs last indefinitely or does it contain the "seeds" of future overperformance? Is it possible to predict when contango will be replaced by backwardation?
Thanks in advance.

Anonymous said...

In days of yore, backwardation was the rule because many contracts were written by suppliers of the underlying commodity. They wanted to lock in a profit at today's prices, and the people on the other side of the trade demanded a small premium to take the risk.

Now, many contracts are written by investors who don't produce the commodity, and so can't simply deliver to settle. Super contango happens when contract writers think prices will go up. They don't want to lose money on the contract, so they demand a higher contract price. Backwardation happens when writers think the price will go down, and so are willing to accept a lower contract price.

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