Friday, July 10, 2009

The Truth About Oil ETFs and Index Funds

I was incensed when I saw the press release from ICE yesterday basically begging the CFTC not to employ position limits on certain energy market players. ICE's release pointed out that only last year did the regulator conduct studies that concluded that 'supply and demand' were behind the unprecedented price rises. That part is true, but the 'demand' came from previously uninterested financial markets players who were suddenly very keen to capitalize on rising oil prices. They quickly designed ETFs and ETNs to offer their customers, while also playing the futures markets from their prop desks. Today there are at least 35 ETFs and ETNs for crude oil and products and 10 for natural gas.
ICE's release also, very cheekily in my opinion, stated that index funds (ETNs) and ETFs account for an 'immaterial' amount of ICE's revenue. And that these funds typically execute their trades in 'OTC broker markets'. REALLY? Why does no one ever see them in there trading then? Surely OTC swaps cannot be priced in real-time for ETF or ETN calculations. And why, when I do a cursory search on the web for the holdings of these ETFs and ETNs are they ALL FUTURES?? Have a look at the USO ETF - WTI futures only and the volume has averaged 13.6 million contracts per day of late. The OIL ETN? Futures only - 1.7 million contracts per day. DBE ETF? Futures only - 138,256 contracts. Only the index funds holding oil company shares seem to differ. I think a certain energy exchange is telling porkies for a certain energy exchange's own self-interest. A certain energy exchange thinks we are all mugs, clearly.


  1. Why are they all futures?
    Well, DUH! The investors in those funds have no intention of taking delivery of the oil, that's why! The company that set up the ETF has no intention of taking delivery of the oil. That pretty much leaves the spot market (and pricing) to the people that might actually want to take delivery and either use it or store it. Since future months have a habit of turning into current months (odd, but true) and the contracts at that point are priced according to current oil supply and demand, I'm not quite sure how the funds (who don't own any contracts at that point) are supposed to be affecting the price.

  2. I was commenting on ICE's claim that ETFs and ETNs are comprised mainly of OTC swaps, which is patently untrue. And funds can impact prices because they keep rolling the current month's contracts forward, which keep them long.

  3. Index funds seem to be quite a good investment option, though they don’t give you whooping returns, over a period of time they grow steadily to give you good returns. There are some merits like, You get the cream of mutual funds, Don’t have to keep a track of individual stocks, Indexed funds are better performers than active funds, like this there are some demerits also such as, it is expensive stocks, Stocks only from within index range.