New Oil ETF (CRUD) Debuts

by on February 23, 2011 | ETFs Mentioned:

Teucrium, the firm that debuted the only pure play corn ETF last year and recently added a natural gas fund, announced the launch of its third exchange-traded product today. The Teucrium WTI Crude Oil Fund (CRUD) offers exposure to futures contracts for WTI crude oil, also known as Texas Light Sweet Crude Oil, traded on the NYMEX. Unlike many of the ETFs in the Oil & Gas ETFdb Category, CRUD spreads exposure across multiple maturities, weighting holdings as follows:

  1. the nearest-to-spot June or December contract, weighted 35%
  2. the June or December contract following the aforementioned (1), weighted 30%
  3. the December contract that immediately follows the aforementioned (2), weighted 35%

That structure is “designed to reduce the effects of contango and backwardation” according to Teucrium, which employs similar weighting strategies in its natural gas and corn funds. The most popular ETF offering exposure to WTI, the United States Oil Fund (USO), invests primarily in front-month contracts and rolls its asset base monthly as they approach expiration. While that strategy can result in higher correlations to spot oil prices, such a methodology can also amplify the impact that the slope of the futures curve has on fund returns. Last year, spot WTI surged by about 15% but USO’s 2010 return was slightly negative.

“By investing in the forward curve and sharply limiting portfolio turnover to twice a year the fund is designed to create the potential for better fund returns, both very important considerations for buy-and-hold investors,” said Sal Gilbertie, President of Teucrium Trading, LLC. “With a growing global focus on energy, we think it’s likely that more and more investors will be interested in increasing their exposure to this increasingly important asset class in an investment vehicle like CRUD.”

Oil ETFs In Focus As Middle East Revolts

Prices for many oil products have climbed higher in recent weeks as a wave of protests across the Middle East has threatened to cut off access to oil rich regions of the world. Prices of Brent oil started to climb higher in late January when protests began to pop up throughout Egypt, sparking fears that the strategically important Suez Canal, though which a significant portion of global oil supplies pass, could be shut down.

Though the revolution in Egypt came about with limited violence, conflicts elsewhere in the region have brought considerable bloodshed. Most recently, conflicts in Libya between mercenaries and anti-Gaddafi troops in Libya sent oil prices spiking; there were reports Tuesday that the Libyan leader had ordered troops to attack oil pipelines in an attempt to cut off a potential source of financing to revolutionaries who had taken control of the eastern part of the country [see Middle East ETFs In Focus].

Traders have also focused in on oil as a potential arbitrage opportunity in recent sessions, as material gaps between different grades of crude oil have appeared thanks to disparate supply conditions. West Texas Intermediate, the blend of oil underlying CRUD and USO, is generally refined in the Midwest and Gulf Coast regions of the U.S. and delivered in Oklahoma. Thanks to soft demand for energy commodities in the U.S., stockpiles have climbed in recent months. Brent crude, on the other hand, has spiked higher thanks to the heightened geopolitical tensions in the Middle East. Brent blend is a combination of crude oil from 15 different oil fields in the Brent and Ninian systems located in the North Sea, making it a “light” crude oil but not as light as WTI. Brent is typically refined in northwest Europe.

Because WTI is easier and cheaper to refine into gasoline, is has historically traded at a slight premium to Brent. But thanks to concerns about major supply disruptions overseas and abundant inventories in Oklahoma, Brent has been trading at a premium of close to $12 per barrel relative to WTI in recent sessions. Some argue that Brent is becoming a more important indicator of global supply and demand, while others believe that a collapse of the premium is inevitable [see BNO vs. UNO: The Gap In Oil ETF Performance].

Teucrium Lineup

With the addition of CRUD to a product suite already featuring a corn fund (CORN) and natural gas fund (NAGS), the Teucrium lineup now includes three single commodity ETFs. In a filing last summer, the Vermont-based firm laid out plans for several additional products, including a sugar fund, soybean fund, and wheat fund.

[For more on the new crude oil ETF, see the CRUD fact sheet. For updates on all ETF launches, sign up for our free ETF newsletter.]

Disclosure: No positions at time of writing.