United States Oil: The New Exchange-Traded Fund
The ETF community is buzzing over the upcoming release of USO (United States Oil) due out on Monday. When I first read about the creation of USO, the new commodity-linked fund, I thought the timing was very appropriate. Crude oil is the world’s most actively traded commodity. Regardless of its extensive trading volume, the average investor doesn’t try his hand at the futures market too often as a result of its complicated and risky nature. The best way for an investor to get involved in oil futures is through a mutual fund or exchange-trade fund which invests in a basket of commodity futures.
The Amex and United States Oil are waiting for the SEC to approve the issue, which will track the light, sweet crude, for trading (hopefully) April 3rd. In the SEC filing, there is a proposed rule change which is necessary for the issue to make it onto the open market. That rule change will allow “partnership units” in a commodity pool to be listed and traded. The Amex is trying to get the SEC to agree to the listing of USO which is the first division of partnership units created to trade commodity-based or commodity-linked securities. The reason for its complication involves the procedures of limited partnerships and the roles of both the general and limited partners. The general partner in this issue, as cited in the SEC filing, is California-based Victoria Bay Asset Management LLC, a subsidiary of Wainwright Holdings Inc, and controlled by Nicholas Gerber.
Information about USO’s underlying portfolio holdings will be available at www.unitedstatesoilfund.com. The site is not up yet, but should be pending SEC approval of the issue.
The NAV for USO is expected to track the spot price of West Texas light, sweet crude oil. West Texas oil is the most actively traded commodity in the world. This makes transactions within the ETF both cheaper and more liquid. The expense ratio, comprised mainly of management fees and brokerage commissions, should be in the range of 40-70 basis points.
The introduction of USO presents an opportunity to buy into a market which is not normally accessible to individual investors. There are individual stocks which correlate positively to the oil market, including petroleum companies, and the increasingly popular oil sands and oil refining stocks. These are undoubtedly linked, but not a good substitute for an oil futures contract. On that note, USO will act as a great portfolio diversification tool. An investor who understands the micro and macroeconomic issues surrounding oil demand will likely allocate a portion of money into this market.
For more information on exchange-traded funds, or any general questions, please e-mail me.
Russell Bailyn
rbailyn@gmail.com
This article is for informational purposes only. My blog is in no way a solicitation, or recommendation to purchase or sell any investment product. There are many risks inherent in investing and you should speak to your financial consultants prior to making any investment decisions.
