Tracking Oil with Treasuries: The New Face of Oil ETFs

MacroMarkets new paired oil ETFs launched last week, replacing the previous oil ETFs (UCR and DCR) that were liquidated in June after reaching their termination triggers. Unlike the popular United States Oil (USO), these paired ETFs hold cash instruments and transfer funds between each other, instead of holding oil futures contracts. The paired ETFs will track the price of crude on the NYMEX, and will transfer funds dollar-for-dollar with the price of crude. The securities will use a “reference price” of $100 crude, and the funds NAV at inception is one quarter of the reference price. The funds have a 95 basis point expense, for essentially holding cash.

This structure is unique because the Oil up (UOY) and Oil Down (DOY) will have no impact on the oil market. With the United States Oil ETF, the fund must roll into the futures of the upcoming month, and sell off futures of the expiring month to avoid delivery of crude. Sam Masucci, the CEO of MacroMarkets says “We’re not increasing the trading volume in futures, we’re not storing barrels of oil, we have a passive involvement in the oil market. We’re not affecting the price of oil”. These new offerings will have a liquidation price when oil closes above $185 for three consecutive days.

This unique structure is patented by the company, and is not the only fund they will be offering with this structure. The company has filed with the SEC for paired up and down real estate ETFs, which will track the S&P/Case-Shiller Composite-10 Home Price Index, with a 2x leverage factor. For more detailed information on the paired ETF methodology, visit MacroMarkets website.

DCR "Oil Down" ETF Going to Zero?

It's been a wild ride for Oil based ETFs over the last few months, especially for the MacroShares Oil Down ETF (DCR), which rises in price when the price of oil drops. Needless to say, DCR has been severely punished as oil prices have now cleared 130. On April 17th MacroShares issued a press release as follows: "The NYMEX light sweet crude oil futures contract for June closed at $114.36 on Wednesday, April 16th at 2:30. This marked the third consecutive business day that the reference price for MacroShares Oil Up and Down (UCR and DCR respectively) closed at or above $111. This triggered an early termination event for the securities. On July 3rd, a final distribution payment will be made to the UCR and DCR shareholders of record as of June 30th based on the underlying value of the Up and Down MacroShares Trusts. The underlying value of the trusts will be determined based on the June 25th closing price of the NYMEX light sweet crude oil futures contract for August."

So what does this mean for investors of DCR? Basically Oil needs to drop below $120 for DCR to have any value for the distribution. The value for the shares will be based on the following forumla: ($120 - Crude) / 3 = NAV

So if you're looking for a more conservative short play on crude oil, and with a longer timeframe than a few weeks, pass on DCR and look to shorting or buying puts on the USO instead.