New Short Crude Oil ETF Offers Unique Exposure

by on September 26, 2009 | ETFs Mentioned:

Denver-based United States Commodity Funds has launched another exchange-traded commodity product, its first to offer inverse exposure to commodity prices. The United States Short Oil Fund (DNO) began trading this week on the NYSE Arca Exchange. DNO is the sixth product from United States Commodity funds, joining products offering exposure to crude oil (USO), natural gas (UNG), 12-month oil (USL), gasoline (UGA), and heating oil (UHN).

Oil Platform Off the Brazilian CoastDNO will seek to track the inverse of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the price of futures contracts on the commoidty. The fund will invest in near month futures contracts, except when the near month contract is within two weeks of expiration, in which case it will invest in the next month’s contract.

The launch of DNO comes in a very interesting and uncertain regulatory environment. The Commodity Futures Trading Commission is “breathing down everyone’s necks,” notes Scott Burns, and is widely expected to enact new position limits later this year. And it now appears that exchanges are enforcing strict accountability limits, guidelines established to warn when firms have taken significant positions in commodity contracts. Although accountability limits have been on the books for ages, they have historically been rarely enforced.

Earlier this month, Deutsche Bank announced that its was shuttering the PowerShares DB Crude Oil Double Long ETN, which offered leveraged exposure to oil prices. Matt Hougan at Index Universe notes that the fund closure was apparently driven by violation of accountability limits.

Stiff Competition

Deutsche Bank and PowerShares have teamed up on the PowerShares DB Crude Oil Short ETN (SZO), which also offers inverse exposure to oil prices through the use of futures contracts. SZO has an expense ratio 0f 0.75%, slightly lower than the 0.81% charged by the new fund from USCF.

There are also a couple of products offering inverse leveraged exposure to oil prices, including the ProShares UltraShort Dow Jones-AIG Crude Oil (SCO) and PowerShares DB Crude Oil Double Short ETN (DTO). SCO offers leveraged exposure with a daily focus, while DTO seeks to generate amplified returns based on the monthly changes in crude oil prices.

Disclosure: No positions at time of writing.