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Make sure you understand your tracker fund
If you have invested in any exchange-traded products, it is vitally important that you understand how your tracker's underlying investment is priced, says Paul Amery.
Crude oil, the single most important commodity for the world's economy, has shot up to nearly US$120 a barrel, approaching the all-time high it reached in 2008. Or has it?
Depending on which measure for the oil price you use, a barrel of crude today (28 February) costs either $113 (Brent) or $98 (West Texas Intermediate, WTI). The US$15 differential between these two popular benchmarks for the oil price is at an all-time high. The price divergence has been put down to a temporary supply glut at the fuel hub at Cushing, Oklahoma, where the WTI price is fixed. Meanwhile, Brent crude, which has a significant Middle Eastern component, has been affected by the recent instability across north Africa and the Gulf.
This price divergence between Brent and WTI crude has had a significant effect on the performance of two of Europe's most popular oil trackers, ETF Securities' Crude Oil ETC (LSE: CRUD) and the same firm's Brent Oil ETC (LSE: OILB). CRUD tracks futures contracts based on the WTI oil benchmark, while OILB tracks Brent futures.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Since the end of August, CRUD has gained 21%, while OILB is up more than double that to 47%. CRUD's underperformance has been made worse by the fact that WTI futures have moved into strong contango (this is when futures prices exceed the 'spot' price, or the price for immediate delivery. This makes replacing an existing contract with a new one more expensive). In fact, investors in CRUD have made no money in 2011, despite a 7% upwards move in the price of spot WTI oil. For an ETC holder, the gain in the spot oil price has been eaten away by contango, in a replay of what happened in 2009 (in that year, investors in oil trackers based on rolling an investment in front-month futures made very little money, despite a near 70% gain in spot oil prices).
But there's a message here for exchange-traded product investors
XXX Fund top ten holdings
Swipe to scroll horizontally
new col
Holding 1
Row 1 - Cell 1
10.0
Holding 2
Row 2 - Cell 1
9.0
Holding 3
Row 3 - Cell 1
8.0
Holding 4
Row 4 - Cell 1
7.0
Holding 5
Row 5 - Cell 1
6.0
Holding 6
Row 6 - Cell 1
5.0
Holding 7
Row 7 - Cell 1
4.0
Holding 8
Row 8 - Cell 1
3.0
Holding 9
Row 9 - Cell 1
2.0
Holding 10
Row 10 - Cell 1
1.0
that goes well beyond the oil market. Not all asset classes have a single, publicly determined reference price. Multiple opinions of an asset's price can coexist this also happened in parts of the bond market, for example, during the worst of the credit crisis. So be sure you understand how your tracker's underlying investment is priced, and by whom the price is calculated.
Paul Amery editswww.indexuniverse.eu,the top source of news and analysis on Europe's ETF and index-fund market.
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Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.
