XOIL Tries To Be Spot-On Spot

March 18, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs)

Global X launched a new equity ETF on Tuesday (3/15/11) that attempts to achieve high correlation to crude oil spot prices.  Global X Oil Equities ETF (XOIL) provides exposure to pure-play oil companies with significant oil reserves that are typically not involved in other industries such as natural gas or downstream operations.

The underlying Solactive Global Oil Equities Index tracks the performance of 25 equal-weighted companies that have shown a high correlation to the spot price of oil.  Constituents are ranked and chosen by their correlation to the spot price of oil in the quarter preceding the selection day.  The index has a global mandate, but only North American stocks passed the most recent correlation screen with 80% currently allocated to the U.S. and 20% to Canada.

The equal weighting helps mitigate single company risk while allowing the correlation characteristics to remain prominent.  The slight variations in the allocations of current holdings are the result of individual security performance since the last index rebalancing.

Investor frustration regarding the inability of most crude oil ETPs to successfully track the spot price of oil over time is well documented.  Since it is not practical to have a physically-backed crude oil fund, existing products rely on futures contracts to implement their strategies.  With crude oil futures markets typically in contango, the funds tend to lose ground to the spot price every time they roll-forward expiring contracts.

Will XOIL meet investor’s expectations by tracking spot oil prices better than existing products?  Only time will tell.  A representative from Structured Solutions, the index provider, states the index had a 0.63 correlation over the 5-year backtest.  The fund has a 0.49% expense ratio, and additional information is located in the summary, fact sheet (pdf), 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.

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