CRUD: Another Way To Buy 12 Months of Oil Contango
Teucrium Trading today (2/23/11) launched the Teucrium WTI Crude Oil Fund (CRUD), providing investors with unleveraged exposure to crude oil futures contracts. The fund’s objective is to reflect the daily percentage change in a benchmark consisting three varying West Texas Intermediate (Texas Light Sweet) crude oil contracts.
The official description of CRUD’s investment objective:
“…is to have the daily percentage changes of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for futures contracts for WTI crude oil, also known as Texas Light Sweet crude oil (“Oil Futures Contracts”) traded on the NYMEX, specifically, (1) the nearest to spot June or December WTI Oil Futures Contract, weighted 35%; (2) the June or December WTI Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the December WTI Oil Futures Contract that immediately follows the aforementioned (2),weighted 35%; less the Fund’s expenses.”
That is a difficult description to get your arms around. Reviewing the holdings and the roll dates might make it easier, as it shows contracts for June 2011 at 35%, December 2011 at 30%, and December 2012 at 35%. The two roll dates will be in April and October each year. In the April roll, 5% of the fund will roll 6 months ahead while 30% rolls 12 months. In the October roll, 5% of the fund will roll 6 months, 5% 12 months, and 30% will be extended 24 months. As a result, the entire portfolio will be extended by 12 months each calendar year.
CRUD claims that rolling twice a year instead of monthly will mitigate the contango effect that has plagued other crude oil products. I am not sure the long-term impact will be much different, however. Most crude oil futures ETFs (and ETNs) end up paying for an average of 12 months of contango per year. They just go about it in different ways mathematically:
- United States Oil Fund (USO) and iPath S&P GSCI Crude Oil ETN (OIL) buy 12 months of contango each year by doing 1-month rolls on 100% of their portfolios every month. 1-month roll x 12 times/yr x 100% = 12 months of contango.
- Unitied States 12 Month Oil Fund (USL) buys 12 months of contango each year by doing 12-month rolls on 1/12th of its portfolio every month. 12-month roll x 12 times/yr x 8.33% = 12 months of contango.
- Teucrium WTI Crude Oil Fund (CRUD) will buy 12 months of contango each year by doing 6-month rolls on 5% of its portfolio twice, 12-month rolls on 5% of its portfolio once, 12-month roll on 30% if its portfolio once, and 24-month rolls on 30% of its portfolio once a year. This adds up to 12 months of contango (but the proof is left as an exercise for the student).
Therefore, the best-performing fund will be dependent on the steepness of the contango curve in the oil futures market at the time they are all doing their rolls. If contango were fixed and linear (24-month premium being 24 times the cost of the 1-month premium), then theoretically only expense ratios (1.00% for CRUD) and transaction costs should come into play. Futures markets are seldom so cooperative, unfortunately.
Teucrium is probably hoping that traders will pronounce the ticker symbol as “crude” although I wouldn’t be surprised if the “crud” pronunciation wins out to avoid confusion with real crude oil. Additional information is located at the CRUD home page, fact sheet (pdf), presentation, and prospectus (pdf).
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.