Exchange traded fund investors may find a better way to control their oil exposure through two new AccuShares ETFs designed to track swings in the spot price.
On Tuesday, June 28, AccuShares Investment Management brings to market the AccuShares S&P GSCI Crude Oil Excess Return Up Shares (NasdaqGM: OILU) and AccuShares S&P GSCI Crude Oil Excess Return Down Shares (NasdaqGM: OILD).
The new ETFs could potentially offer a more reliable way to track and capture oil market moves, without the trading costs and structural flaws associated with other oil-related exchange traded products.
Popular U.S.-listed exchange traded products track crude oil futures. Consequently, the more well-known oil ETFs are exposed to the negative effects of contango in the futures market.
Related: Strong U.S. Dollar, Global Uncertainty Weigh on Oil ETFs
Contango occurs when later-dated contracts trade at higher prices relative to contracts that are close to maturity, which may cause the funds to sell low and buy a new contract at a higher price. For instance, according to the CME Group, August 2016 WTI crude oil contracts were hovering around $46.67 per barrel while July 2017 WTI crude oil contracts were trading around $50.30 per barrel.
Since ETFs have to roll over contracts, or sell those close to maturity, and buy a later-dated contract, these futures-based oil ETFs would essentially sell low and buy high, losing money on each roll during a contangoed market.
[related_stories]However, AccuShares has come up with a different approach with the new oil products. The funds will track changes in the price of oil through the S&P GSCI Crude Oil Index over a one-month period. Moreover, the funds will come with a distribution to shareholders of cash on prescribed distribution dates – the Up shares will be entitled to a distribution when the fund’s underlying index has increased as of a specific dates or by more than 75%, and the Down shares will be entitled to a distribution when the underlying index declined.
“The new oil ETFs’ structure is unique and allows investors to differentiate them from existing products,” Keith Cunningham, Chief Marketing Officer at AccuShares, told ETF Trends on a call.
Specifically, Cunningham pointed to three points: Firstly, OILU and OILD have the lowest all-in fee structure by far among oil ETFs. Secondly, due to its indexing methodology, ETF investors will not have to fill out a K-1 form come tax day. Lastly, OILD may offer a more pure inverse option for people to go short since it is not subject to the daily rebalancing that other bearish funds undergo.
“Traders may enjoy a more institutional investment experience,” Cunningham added.
The two new ETFs will hold only cash, short-dated U.S. Treasuries or collateralized U.S. Treasury repurchases. The ETFs will not invest in commodities, futures, swaps or other assets that may track the underlying oil index.
Consequently, due to its portfolio make up, OILU and OILD come with a much cheaper 0.29% expense ratio, compared to the average expense ratio of 0.81% for all commodity-related ETPs and more expensive futures-backed ETFs.
Related: A Very Bullish Call for Oil ETFs
The two oil ETFs are also seen as two faces to coin since the funds are part of a multi-share class product. Cunningham describes the up-down share class as a self-hedging ecosystem where one share goes up and the other goes down.
“The benefits to the Up Share Class is equal to the adverse impact to the Down Share Class and vice versa,” according to AccuShares. “Investors must choose either the Up or the Down Shares based on their individual opinion of the future direction of the Underlying Index.”
For more information on new fund products, visit our new ETFs category.