Monday, January 08, 2007
A reader asked if I knew why the Oil ETF that trades under ticker USO trades at such a big disparity to the price of crude oil. I do not have all the answers but the short answer is the prospectus gives it leeway to fluctuate by X% on a daily basis, you can read the prospectus to see what X is, I don't recall.
I looked at the fund on a superficial basis when it listed and it became clear to me that I would not be able to have a good feel for what the tracking error would do, meaning it could be bigger or smaller during different time periods.
In wanting to introduce commodities, or for that matter currencies as well, to client portfolios I want a relatively simple product that will capture the effect. The allowance for USO to diverge is not my idea of simple. Forming an opinion about what a commodity might do (note I am not saying being right, just forming an opinion) is much easier than forming an opinion AND guessing what a product will do relative to the thing it tracks.
As you look at the chart it is ugly. As I understand it, though the gap has grown larger it could possibly narrow in the future. I'm not saying it will, I have no idea, but gaming this and the actual price of oil too makes this something I have no interest in.