Investor's Business Daily, June 21st, 2007
The oil prices streaming below the talking head on cable TV hardly resemble what you see if you own an oil fund.
MacroMarkets invented macros, an exchange traded product that tracks the price movement of crude oil, without actually buying barrels of the stuff.
It has run into the unforeseen consequences of supply and demand and structural complications. So its prices don't match crude's. But that's not necessarily bad.
Swap Agreements
Claymore MacroShares Oil Up Tradeable Shares UCR and Claymore MacroShares Oil Down Tradeable Shares DCR are designed to work together like a seesaw. They're always issued in pairs. They mimic changes in the settlement price of the Nymex light, sweet crude futures contract by swapping money between each other.
The two started trading at $60 when they launched in December. So the combined net asset value of the two is supposed to be $120. Their NAVs are adjusted every day based on the closing price of oil.
When a barrel of crude oil goes up a dollar, DCR rises $1 while DCR falls $1. The opposite happens when the price of oil falls.
Instead of holding oil or futures like other oil ETFs, they hold short-term T-bills and overnight repurchase agreements, or repos. Those are short-term borrowing contracts. So UCR and DCR also offer dividends. But those are lessened by the 1.6% expense ratio vs. 0.75% for other oil ETFs.
Price Performance
Theoretically, UCR should trade close to $69 -- the price of crude oil on Thursday. But the funds have premiums and discounts similar to closed-end funds. As of Thursday, UCR traded at $75.60 -- 8.85% above its net asset value. And DCR traded at $45.44 -- 12.72% less than its NAV.
Why? First, it's because of a greater demand for UCR than DCR. Second, unlike other oil ETFs such as the United States Oil Fund USO, UCR and DCR have reduced the cost damage of contango. That's when the next month's contract costs more than the current month's, taking a loss every time it rolls from one month to the next.
"In the current market, that's a painful proposition, thanks in part to a pipeline-storage issue in Oklahoma, where the oil promised under these futures contracts gets delivered," said Matt Hougan, editor of IndexUniverse.com. "No one wants to take delivery of crude right now in Oklahoma, so the current month futures contract is artificially depressed."
Hougan says the MacroShares don't actually roll their contracts each month: They price in the value of a rolling futures contract over the long haul, allowing them to sidestep the Oklahoma-related price issues.
Because of the contango factor, USO's price has failed to rise while the cost of crude has climbed 13% this year.
