Paul Justice: Hi. I am Paul Justice, ETF strategist with Morningstar. Today, I am joined by Jeremy Held from Alps, the distributor of the US commodity funds. Thank you for joining me.
Jeremy Held: Thank you.
Justice: I'd like to talk to you a little bit about two very popular funds right now on the commodities space: United States Oil (Ticker: USO), and United States Natural Gas (UNG). Several billions of dollars are invested in these products now, and I think it's a great example of the way ETFs have brought a new investor experience to the market, being able to invest in individual commodities. But, I also think that, based on the feedback that we've gotten, a lot of the investors don't really understand how these markets work; you are not buying the underline commodities. Could you give a little bit of explanation as to what is going on there?
Justice: Sure, I don't want a barrel of oil in my garage and I know that gas is going to evaporate into the air.
Held: Correct, correct. So, for the most part, the best way to invest in those oil products or natural gas is through the futures market, but people need to be aware of the fact when you invest in something through futures, you have additional risk factors that you may not have if you're investing in the physical commodity.
Justice: Sure. Now, I think that we had feedback from people saying they bought USO back in December, oil was trading nearly as low as $35 and oil has since come up to about $70. But, the returns that they have gained on the USO fund haven't mirrored that--they haven't really come close--and it's not something that should be unexpected. We see why this has happened, but do you think the investors understand what the components of that are?
Held: I think, they are starting to learn that when you own a futures-based commodity product, the future is going to have rolled or repurchased every month or every quarter depending on the strategy of the fund, and it really depends on what the shape of the futures curve is. Now, it's analogous to a yield curve and depending upon a lot of different factors based on the supply and demand for the commodity, that futures curves can either be upwardly sloping or downwardly sloping. In the case of the oil this year, it has been upwardly sloping, what we call contango. So, every time that we are rolling over a futures contract, we are buying more expensive futures, which erodes the value of the fund.
Justice: Sure, and this happens periodically. And, so investors should understand that you are buying a strategy really, you are not buying the underline commodity. It's not going to be moving in the same dynamics. So, these might not be the best vehicles for speculating on explicit price moves. Their research needs to go a bit further than that.
Held: Yeah, I mean, if people are going to trade commodities, these are great trading vehicle; they trade millions of shares a day. But, if you are looking to make a speculative move on the price of the commodity, you just want to take a look at the futures curve and understand that there are other risk factors beside this movement on the spot commodity.
Justice: I think we both agree that it could potentially be a very disturbing investor experience if you get in with expectations that the spot price is the only thing that you need to be looking at.
Justice: And I think that everyone in the ETF industry agrees. We need to make sure that the investor experience is enhanced by getting this information out. So, I appreciate you bringing this to the table. I am Paul Justice for Morningstar. Thank you Jeremy.
Held: Thank you.