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Articles on USO

  • Commodities Withstood the Recent Market Selloff

    03/21/2011

    Commodity ETFs again showed their divergence with other risk assets last week: during the market selloff last week. The broadbase commodity index like Powershares commodity index (DBC) actually registered a 0.78% gain. Natural gas (UNG) had a big jump, gaining 6.83% while gold (GLD) was steady. Silver had the biggest drop of 2.17%. Fore more detailed performance, please refer to here.

    From the following trend score table, one can see the broadbase commodity index (DBC) actually had its trend score increased in last week. 

    Assets Class Symbols 03/18
    Trend
    Score
    03/11
    Trend
    Score
    Direction
    Silver SLV 40.11% 47.09% v
    Energy DBE 16.53% 14.75% ^
    Commodity DBC 14.15% 12.94% ^
    Precious Metals DBP 14.15% 15.87% v
    Agriculture DBA 12.09% 14.21% v
    US Oil USO 10.34% 8.1% ^
    Gold GLD 8.86% 9.46% v
    Base Metals DBB 6.53% 4.5% ^
    Natural Gas UNG -5.95% -13.75% ^
    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    Amid the somewhat severe and volatile market correction last week, it is relevant to review several commodity themes again here: 

    • Agriculture commodities (DBA): world food price has risen in the past several years and the demand from emerging middle classes outstripped the supply. See Commodities Trends: Food Prices Rose More Than Normal CPIs for more analysis. 
    • Precious metals (gold, silver) (DBP): governments around the globe pumped money to stimulate the economy, let alone the quantitative easing 1-2 by the U.S. central bank would surely make paper currencies less valuable and thus precious metals (Gold and Silver) become the defacto hard currencies. We also pointed out that Silver plays dual roles (as a proxy to hard currency and a proxy to general industrial activities being a metal of practical use). 
    • Energy (Oil (USO) or natural gas (UNG)) (DBE): Amid the middle east political unrests and recent Libyan's upheaval (Libya has the ninth largest oil reserve in the world), oil production is in danger of sudden disruption. 
    • Broadbase commodities (DBC) (GSG): Along with the mentioned factors, recent natural disaster in Japan, the third largest economy in the world, will only add more government supported stimulus, commodity hoarding will only get worse. 
    Though strong fundmentals are supporting commodity investing for now, we should point out that commodities are notorious volatile: geopolitical events and general economic activities (and expectation, such as inflation expection) can change the direction of commodities dramatically. It is thus important to properly allocate in one's portfolios and actively manage a portfolio's asset allocation. Interested readers are referred to several previous articles on the role of commodities in portfolio management: 

    Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB ,


    Exchange Symbols: (NASDAQ: SLV), (NASDAQ: DBP), (NASDAQ: GLD), (NASDAQ: DBB), (NASDAQ: DBA), (NASDAQ: DBC), (NASDAQ: DBE), (NASDAQ: USO), (NASDAQ: UNG), (NASDAQ: SPY), (NASDAQ: QQQQ), (NASDAQ: IWM), (NASDAQ: MDY), (NASDAQ: EFA), (NASDAQ: VEU), (NASDAQ: EEM), (NASDAQ: VWO), (NASDAQ: IYR), (NASDAQ: ICF), (NASDAQ: VNQ), (NASDAQ: GSG), (NASDAQ: LQD), (NASDAQ: CSJ), (NASDAQ: CIU), (NASDAQ: HYG), (NASDAQ: JNK), (NASDAQ: PHB), (NASDAQ: TLT), (NASDAQ: IEF), (NASDAQ: SHY), (NASDAQ: SHV), (NASDAQ: BND), (NASDAQ: AGG), (NASDAQ: MUB), (NASDAQ: MBB)

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

     

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  • Commodity Investing: Long Short (S&P Commodity Trend Indicators) vs. Long Only

    03/13/2011

    Last week's market volatility is a good reminder on how precarious it is in commodity investing. For the week, broadbase commodity index ETF (DBC) dropped 3.09% while Gold (GLD) fared better, dropping only 0.81%. Agriculture commodity (DBA) dropped even more: 3.71%. For more detailed information, please refer to here.

    It is now generally recognized that adding commodity exposure in a long term portfolio that adopts a strategic asset allocation strategy can increase diversification effect and thus possibly improving risk adjusted returns. However, given the high volatitily (and risk) of commodities, it is important for an investor to understand the difference between a long only approach and long short approach in this asset investment. 

    A long only approach is simply just buying a commodity index such as Powershares DB Commodity Index ETF (DBC) or GSCI commodity index (GSG)  (or sub index such as agriculture (DBA), precious metal (DBP)). A long short approach, on the other hand, can take long and/or short positions on mutliple commodity components simultaneously. It is mostly based on technical indicators such as moving averages, momentums and reversals. This approach has been adopted by professional CTAs (Commodity Trading Advisors). A simple and popular strategy is the S&P Diversified Commodity Trend Indicators. The following is a short description of the strategy: 

    The strategy is a simplified variation of  S&P commodity trends indicator (CTI). It is a subset of the S&P DTI by simply eliminating half of the financial assets.

    1.The original asset allocation

     

    Energy  37.5%

    Powershares DB Energy  (DBE)

    Industrial metal  10%

    Powershares DB Base Metal  (DBB)

    Precious metal  10.5%

    Powershares DB Precious Metal  (DBP)

    Agriculture  42%

    Powershares DB Agriculture  (DBA)

    2. Position determination

    The monthly percentage change of a sector’s price is compared to past monthly price changes exponentially weighted to give greatest weight to the most recent return and least weight to the return seven months prior.

    The weights are as follows:

    NUMBER OF MONTHS

    WEIGHT

    2.32%

    6

    3.71%

    5

    5.94%

    4

    9.51%

    3

    15.22%

    2

    24.34%

    1

    38.95%

    3. Monthly rebalancing

    The portfolio is rebalanced monthly by setting every sector to their original percentage and do the position determination again.

    For more information, please refer to
     "Standard and Poor's Commodity Trend Indicator" document. 

    The following table compares the performance between such S&P Commodity Trend Indicators Portfolio (S&PCTI)  and a general broadbase commodity ETF (DBC):

     

    Portfolio

    Last 3 Years

    Last 1 Years

    2007

    2008

    2009

    2010

    2011

     

     

                 

    AR(%)

    S&PCTI

    5.049

    14.884

    15.939

    23.768

    2.282

    3.186

    5.148

    AR(%)

    DBC

    -8.826

    25.383

    31.579

    -31.799

    16.187

    10.154

    7.695

    Sharpe Ratio(%)

    S&PCTI

    29.127

    113.142

    91.832

    107.569

    14.048

    23.723

    39.12

    Sharpe Ratio(%)

    DBC

    -20.516

    150.174

    160.984

    -97.51

    58.736

    52.501

    415.108

    Standard Deviation(%)

    S&PCTI

    16.389

    13.074

    16.719

    21.232

    15.572

    13.045

    13.119

    Standard Deviation(%)

    DBC

    27.914

    18.435

    17.728

    34.962

    27.397

    19.578

    15.275


    Though S&PCTI under performed in 2009, 2010 and 2011, it out performed DBC in the last 3 years. This is because it had 23.8% return in 2008, compared with DBC's 31.6% loss in the same year. Furthermore,  S&PCTI has a standard deviation 16%, compared with DBC's 28%. In fact,  S&PCTI's standard deviation is consistent with that of an overall stock market index such as S&P 500 (SPY). 

    It is perhaps even more important to pay attention to maximum drawdowns for S&PCTI:  since its inception 10/1/2007 (this is due to the short histories of commodity ETFs used in this portfolio), the maximum drawdown is about 19% vs. DBC's whopping 60% (during the 2008-2009 detacle). 

    The takeaway from this article is that for active investors, one might want to consider adopting a more conservative approach in commodity exposures. Investors can find Element's ETN (LSC) or Direxion's Commodity Trend Strategy Inv (DXCTX) that implement the S&P  Commodity Trend Indicators strategy. Before you invest, however, you are encouraged to compare the portfolio S&PCTI, LSC and DXCTX.

    In the follow up articles, we wil further compare how the long only and long short strategies can be used in strategic and tactical asset allocation portfolios. 

    Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,


    Symbols (exchange): (NYSE:SLV), (NYSE:DBP), (NYSE:GLD), (NYSE:DBB), (NYSE:DBA), (NYSE:DBC), (NYSE:DBE), (NYSE:USO), (NYSE:UNG), (NYSE:SPY)

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical 

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  • Commodity ETFs: Does Everyone Need Energy Investment?

    03/07/2011

    Last week is another strong week that saw strong ascent of commodity ETFs across the board (other than natural gas ETF (UNG)). US Oil (USO) and Silver (SLV) shot up more than 6% while broadbase commodity ETF (DBC) gained 2.56%. For more detailed performance, see here

    The unrest in middle east drove oil prices higher again: WTI crude oil reached $104 per barrel. According to an article by Jason Zweig on The Wall Street Journal, $1.4 billion new money was poured into energy related investments in just one week ended on last Wednesday. Speculation is abound. 

    A broadbase commodity index ETF usually has adquate energy related exposure. For example, Powershares DB Commodity Index (DBC) has the following weights:

    Commodity Contract Expiry Date Index Weight Base Weight
    Aluminium 9/21/2011 3.90% 4.17%
    Brent Crude 2/14/2012 13.52% 12.38%
    Copper - Grade A 3/21/2012 4.24% 4.17%
    Corn 12/14/2011 5.47% 5.63%
    Gold 8/29/2011 7.03% 8.00%
    Heating Oil 5/31/2011 13.70% 12.38%
    Light Crude 6/21/2011 12.54% 12.38%
    Natural Gas 9/28/2011 4.40% 5.50%
    RBOB Gasoline 11/30/2011 13.47% 12.38%
    Silver 12/28/2011 2.16% 2.00%
    Soybeans 11/14/2011 5.51% 5.63%
    Sugar #11 6/30/2011 5.23% 5.63%
    Wheat 7/14/2011 5.17% 5.63%
    Zinc 5/18/2011 3.65% 4.17%

    Energy exposure in DBC amounts to 57.63% as of 3/3/2011!  

    In the article, Zweig questioned whether one needs to have energy stocks, especially energy company stocks made up 13% of S&P 500 index. We concur with him that investors should be cautious in the face of such a speculative rush. On the other hand, a portfolio that has commodity exposure can be more diversified and thus, reducing risk and enhancing return in general. This is not necessarily always the case. The following table compares the performance of a portfolio with 5 core assets: US Equities (VTI), Foreign Equities (VEU), Emerging Market Equities (VWO), REITs (VNQ) and Total Bond Index (BND) and a portfolio with an extra asset (DBC). 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate 16% 127% 6% 27% 8% 33%
    Six Core Asset ETFs Strategic Asset Allocation Moderate 16% 131% 5% 22% 7% 35%

    The portfolio with the additional commodity asset slightly under performed. On the other hand, if one adopts a tactical asset allocation strategy, adding the commodity asset will improve the performance and Sharpe ratio: 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETFs Tactical Asset Allocation Moderate 15% 110% 11% 83% 15% 102%
    Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate 11% 80% 10% 81% 13% 85%


    The following table illustrates the trend score among commodity ETFs. 

    Assets Class Symbols 03/04
    Trend
    Score
    02/25
    Trend
    Score
    Direction
    Silver SLV 46.52% 44.61% ^
    Agriculture DBA 18.61% 18.17% ^
    Energy DBE 17.6% 17.3% ^
    Commodity DBC 16.8% 16.74% ^
    Precious Metals DBP 15.95% 15.56% ^
    US Oil USO 12.94% 9.09% ^
    Base Metals DBB 10.0% 13.17% v
    Gold GLD 9.66% 9.84% v
    Natural Gas UNG -19.04% -13.96% v

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).


    The takeaway is that one can gain energy exposure by investing in broadbase commodity ETF. Investing in a broadbase commodity does not automatically guarantee performance and risk improvement. One has to adopt a tactical (or dynamic) approach to achieve such a goal. 

    Symbols:SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,VTI,VEU,VNQ,VWO,BND,AGG,SPY,EFA,EEM,IYR,

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 

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  • Energy Commodities and Gold Strong: Gold's Role in Asset Allocation

    02/26/2011

    Last week saw a typical volatile reaction in commodity prices during international turbulence: the violence in Libya was a major cause for energy commodities' ascent. It was believed that the uncertain situation in Libya, one of the major oil producers, would stress oil supplies. In the week, U.S. oil (USO) shot up 9.13%, energy ETF (DBE) gained 6.6%. 

    Precious metals functioned again during such a volatile event: Gold (GLD) gained 1.46% while precious metal ETF (DBE) gained 1.76%. For more detailed performance update, please refer to here.

    Assets Class Symbols 02/25
    Trend
    Score
    02/18
    Trend
    Score
    Direction
    Silver SLV 44.61% 45.2% v
    Agriculture DBA 18.17% 18.71% v
    Energy DBE 17.3% 10.83% ^
    Commodity DBC 16.74% 13.62% ^
    Precious Metals DBP 15.56% 14.73% ^
    Base Metals DBB 13.17% 13.41% v
    Gold GLD 9.84% 8.93% ^
    US Oil USO 9.09% 0.88% ^
    Natural Gas UNG -13.96% -20.35% ^

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    A natural question arises from such an event: going forward, are precious metals better positioned than energy commodities as hedges? We make the following observations:

    • Oil and other energy commodties, on the other hand, are very much tied to shocking events that may have concerns on their supply. They are more closely tied to short term political and geographical developments, making them very reactionary to such events. 
    • In the current environment, because of massive monetary stimulus by global governments, investors are conditioned by the fact that the world will eventually enter a high inflationary period (inflationary expectation, not current inflation). Paper currencies are no longer trusted. Such a belief makes precious metals (gold (GLD) or silver (SLV)) as sought after assets. They are more likely go up in any stressful future event. 

     In the following, we compared with the two portfolios that use a tactical asset allocation strategy. Both have broadbase commodity index DBC as a candidate fund. But one has additional gold GLD ETF. The MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate is one of the model portfolios in MyPlanIQ Diversified Core Allocation ETF Plan. The plan consists of 35 funds. It covers 6 major asset classes and 28 minor asset classes. The major asset classes it covers are US Equity, Foreign Equity, Emerging Market Equity, REITs, Commodity and Fixed Income.

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate No Gld 14% 114% 8% 66% 12% 84%
    MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 16% 123% 9% 73% 13% 90%


    From the above table, adding gold GLD to the commodity asset class adds extra 1% annualized return in the last 1, 3 and 5 years. It also enhances portfolio Sharpe ratios. 

    Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB,

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. 

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  • Commodity ETF Trends: Silver Breaks Out, Gold Steady Amid Commodity Strength

    02/20/2011

    Amid steady up trend of U.S. stock markets, silver (SLV) finally broke out last week, ending the week with 8.8% gain. SLV is now above the previous high $30.18 per share, achieved on 12/31/2010. It closed on Friday at $31.79, a historical high. 

    Gold (GLD) was also steady, closing the week with 2.3% gain, though its Friday's closing price $135.47 is still below its recent high of $139.11. For more commodity performance details, please refer to 
    here.

    The following trend table shows the trend scores of commodity ETFs. Silve (SLV) is retaining its first place, way ahead of the second place agriculture ETF (DBA). It should be noted that DBA still has quite some way to go to break out from its previous high $42.03, achieved on 6/30/2008, right before the financial crisis.

    Assets Class Symbols 02/18
    Trend
    Score
    02/11
    Trend
    Score
    Direction
    Silver SLV 45.2% 35.79% ^
    Agriculture DBA 18.71% 19.98% v
    Precious Metals DBP 14.73% 11.42% ^
    Commodity DBC 13.62% 13.58% ^
    Base Metals DBB 13.41% 11.63% ^
    Energy DBE 10.83% 10.06% ^
    Gold GLD 8.93% 6.85% ^
    US Oil USO 0.88% -1.2% ^
    Natural Gas UNG -20.35% -19.85% v

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    Silver, as proxies to both industrial metals (thus sensitive to general economic development) and precious metals, behaves exactly like what we pointed out in our previous several updates. However, one should be aware that it is very volatile: last time after it broke out, it promptly lost more than 10% before it began this leg up. As part of a commodity investment, one should use a systematic way to get exposure to silver. One way to do that is to use a moving average, such as the 130 days (or six month moving average) used in S&P commodity trend indicator strategy. In this strategy, a proper weight is assigned to each commodity chosen and each is governed by six month exponential moving average (EMA). When the price of a component is closed above its six month EMA (in a monthly update), the strategy longs this component, otherwise, it shorts this strategy. 

    The following table shows the historical performance of such a portfolio:

    From 10/01/2007 To 02/18/2011

      2007 2008 2009 2010 2011 1 Yr 3 Yr 5 Yr Inception
    Annualized Return (%) 15.94 23.77 2.28 3.19 3.96 16.57 7.69 NA 14.31
    Sharpe Ratio (%) 91.83 107.57 14.05 23.72 30.67 129.08 44.4 NA 82.19
    Alpha(%) 0.05 0.09 0.01 -0 0 0.03 0.03 NA 0.06
    Beta 0.78 -0.077 0.059 0.333 0.928 0.421 0.021 NA 0.072
    RSquare 0.895 0.016 0.011 0.249 0.914 0.36 0.001 NA 0.013
    Standard Deviation 0.167 0.212 0.156 0.13 0.129 0.128 0.167 NA 0.168
    Treynor Ratio 0.197 -2.969 0.369 0.093 0.043 0.392 3.462 NA 1.928
    Draw Down 0.038 0.149 0.102 0.168 0.023 0.108 0.193 NA 0.193
    Sortino Ratio 1.493 1.517 0.202 0.342 0.456 1.941 0.627 NA 1.184

    From the above table, one can see such a strategy is a perfect hedge to equity invetment: it gained 23.8% in 2008. Though since then it has had anemic performance, with strong trends across all commodities, we expect it will again function as what it intends: strong performance in a trendy market and subdued performance in other cycles. We will publish a follow up article on more detailed analysis on this strategy. 

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

    Symbols: SLV,DBP,GLD,DBB,DBA,DBC,DBE,USO,UNG,SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB,

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  • Beware of Divergence Among Energy Commodity ETFs

    02/14/2011

  • Rising Energy Costs: Casting a Cloud over Energy-Dependent Sector ETFs

    01/15/2011

  • 'Buffett Ratio' for Stock Market Valuation Up 7% Since November

    01/14/2011

  • Country ETFs Flat or Modestly Down While Spain Flounders

    01/12/2011

  • Country ETFs Flat While South Korea and South Africa Spike

    01/06/2011

  • Hussman Index Says Stocks are Overvalued

    01/04/2011

  • Commodity Trends: 2010 Year End Review

    01/03/2011

  • Simple ETF Portfolio Demonstrates the Limits of Momentum Strategies

    01/01/2011

  • Most U.S. Sector End Sharply Higher For The Year

    01/01/2011

  • Country ETF Trends Largely Unchanged: Russia Shines, Spain Tumbles

    12/29/2010

  • Country ETFs Trend: Global Markets Remain Mixed, weighed by Korean Tensions and Europe Debt Concerns

    12/22/2010

  • Shiller Index Close to Triggering a Move to Bonds

    12/22/2010

  • U.S. Sectors Trend: Cautious Gains Amid Mixed Catalyst

    12/19/2010

  • Silver and Gold Continued to Shine While Other Commodities Largely Stable

    12/19/2010

  • Global Markets Largely Flat

    12/14/2010

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