An ETF that does not track

Brent Crude (CRUD)

ETFS WTI Crude Oil (CRUD) as is described on the www.etfsecurities.com website is a tracking index that, simply put, tracks WTI Crude oil. The more formal description is as follows:
 
Investment Objective
ETFS WTI Crude Oil (CRUD) is designed to enable investors to gain an exposure to a total return investment in crude oil by tracking the Bloomberg Crude Oil Subindex (the “Index”) and providing a collateral yield.
 
CRUD is an exchange traded commodity (“ETC”). Its securities can be created and redeemed on demand by authorised participants and traded on exchange just like shares in a company. The ETC is backed by swaps. The payment obligations of the swap counterparties to the Issuer are protected by collateral held which is marked to market daily. The collateral is held in segregated accounts at The Bank of New York Mellon. Details of the collateral held can be found in the Collateral section of the ETF Securities website (www.etfsecurities.com).
 
So what should an investor reasonably expect ?
 
As with most ETF’s an investor following the above would expect this particular tracker to follow, within a tracking margin & fees, the WTI crude oil market. This will not be identical to, but will very closely follow the price of WTI crude oil. The first and possibly most reasonable approach to accuracy would be a comparison of the index performance relative it’s closest trading object (WTI Crude). Here is a resulting chart.
 
 
 

A significant divergence

Needless to say, there is a clear differential and most noticeably an under-performance of the tracking index relative to crude.

The chart above is constructed in a way such that the index and the comparable are re-based to 100 at inception. This way the (positive or negative) error over time can be easily be seen. What is observed in this case is that the differential is of the order of 25%. This is most unusual given that index tracking errors are typically <1%.

As a sanity check the chart includes a major oil related stock (BP Plc). It is not expected for the stocky to perform on a one-to-one basis, but for broader large moves, the observer should expect a superposition follow which clearly is the case.

Possible tracking errors

There are a number of reasons why and ETF (or ETC) may vary from its underlying index. For example the frictional costs of transaction which are additive and negative. Other reasons such as contango and backwardation (which do apply in this particular case) would tend to offset each other over time meaning a lower total error. Factors such as quality of replication which create differences too for example where the index may consist 10% on one component, but the physical hedge is actually 10.5% – again these would be marginal and also offsetting over time.

However, with all of the above, it is unusual to see tracking errors of even a few percent.

Conclusion

One may reasonably conclude that this particular ETC is not fit for purpose. Quite simply put, to the investor, CRUD is not what is says on the tin. whether its the case of the Bloomberg sub index failing to meaningfully replicate the performance of crude oil or the ETC failing to replicate the bloomberg index, or a function of both, the observable fact is that over a 15 month period investors in CRUD have under-performed WTI crude oil and what one may expect to be a reasonable proxy, such as BP (by a hefty 60%). 

Leave a Reply

Your email address will not be published.