United States Oil Fund (USO)

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Oil-ETF launch set for Monday, pending SEC approval
By John Spence
Last Updated: 3/29/2006 2:43:04 PM


BOSTON (MarketWatch) -- The American Stock Exchange plans to introduce the first U.S.-listed oil exchange-traded fund next week pending final regulatory approval from the Securities and Exchange Commission.

The ETF, called United States Oil Fund LP, is set to launch on Monday and trade under the symbol "USO." It will be managed by commodity-pool operator Victoria Bay Asset Management LLC, according to a bell-ringing ceremony invitation sent to journalists by the Amex.

The fund is designed to track crude-oil prices by investing in energy derivative instruments.

The ETF would represent the first time individual investors would have a convenient, liquid vehicle for taking positions in crude oil itself, rather than investing in the shares of energy companies or mutual funds.

Last July, Victoria Bay Asset Management first filed with regulators for an oil ETF but has since changed the name from New York Oil Fund LP. The initial share price for the renamed U.S. Oil Fund will represent the closing price of near-month oil futures contracts on the New York Mercantile Exchange, according to the latest filing.

The fund's investment objective is for shares to reflect the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma, minus expenses. It will invest in energy futures contracts, cash-settled options and other instruments to achieve the oil exposure, and will also hold short-term Treasuries.

The ETF is structured as a commodity pool rather than a mutual fund registered under the Investment Company Act of 1940.

Since ETFs trade on exchanges like stocks, the oil fund would allow investors to take a long position in the commodity, as well as hedge against losses by going short.

Not including brokerage or commission costs, the ETF will have a management fee of 0.5% of assets, according to the filing.

Macro Securities Depositor LLC also has an oil ETF currently in registration, and there are already oil ETFs trading on overseas exchanges in London and Mexico.

Keen interest in fund expected

Morgan Stanley analyst Paul Mazzilli said Tuesday the U.S. Oil Fund ETF appears designed similarly to the first broad-based commodities ETF to use derivatives launched last month, Deutsche Bank Commodity Index Tracking Fund (DBC).

Also structured as a commodity pool rather than a registered investment company, the Deutsche Bank offering uses futures and "rolls" them periodically to maintain exposure to the commodities. It holds U.S. Treasury bills as collateral, which also provide a yield which offsets expenses.

Mazzilli expects the fund will be successful as the first U.S.-listed oil ETF, but doubts it will experience the same fanfare as the first gold ETF, $6.1 billion StreetTracks Gold Trust (GLD), which launched in November 2004.

Other analysts agreed there could be keen interest in the oil ETF given crude's rise the past few years.

Although there are futures contracts based on oil, an ETF makes the commodity more accessible for average investors, said Dan Culloton, analyst at investment research firm Morningstar Inc.

Some investors use small amounts of commodities to diversify their stock and bond portfolios, but Culloton advised caution about leaping into oil since prices are notoriously difficult to forecast.

"There's a history of investors jumping into asset classes at their peak, so it's better to temper expectations and not to expect recent returns will continue forever," he said. "Will investors be as excited about the diversification benefits when oil is falling, and stick with it?"

Additionally, Culloton said he expects the oil fund will be less tax efficient than stock ETFs because of the tax treatment of capital gains on futures contracts.

Alex Reiss, vice president of closed-end funds and ETF research at Ryan Beck & Co., said he sees heavy demand for an oil ETF from investors who want to hedge their portfolios against geopolitical risks in the Middle East. Interest in oil has been high with some analysts predicting prices will continue to climb on supply and demand issues, he added.

However, Reiss noted "oil prices are very volatile and investors shouldn't overly concentrate their portfolios in one asset class or fund."

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