Wednesday, February 18, 2009

Crude Indices and DXO/DTO

So in the last installment of this series, Proshares levered ETFs UCO and SCO were checked and analyzed along with a quick 'n' dirty check of their underlying benchmarks correlation with crude oil. Although one commenter felt that DJAIGCL had little correlation to NYMEX spot, I disagree and recommended he pull the source data and run the closing prices correlation for himself. (Also pay close attention to what I say and more importantly, what I don't say.) Anyhow, for purposes here, I'm going to assume you grant me the earlier statement that DBOLIX actually is reasonably correlated to crude prices. And really, it doesn't matter all that much since this analysis is to see how well the levered ETFs track relative to their respective benchmarks.

While DXO open/close data is available going back to 6/23/08, this data is only available for DBOLIX back to 10/27/08 so the charts here are confined to that date up to 2/10/09. During this period DXO's average track error was -0.71% and the average absolute track error was 3.26%. This compares to UCO's values of -0.16% and 3.62%, respectively. There were 28 positive track errors against 44 negative ones during this period, so one could argue there is a bias for underperforming the +2x intraday percentage expectations. Finally, the closing price correlation between DXO and DBOLIX is 0.987 and the correlation of DXO's intraday percent change with tracking error is 0.01.

As for DTO, the same period applies. During this period DTO's average track error was 1.14% and the average absolute track error was 3.8%. This compares to SCO's values of -0.312% and 3.52%, respectively. There were 41 positive track errors against 31 negative errors during this time. The closing price correlation of DTO and DBOLIX was -0.89 and the correlation of DTO intraday percent change with tracking error is 0.017.
On balance, it seems that DXO/DTO have more difficulties in tracking their benchmark and target performance than UCO/SCO. Part of the explanation for this could lie in the fact that DXO/DTO are ETNs sponsored by Deutsche Bank as opposed to ETFs. The ETN suffers from risk exposure both to the underlying commodity and the sponsoring institution and DB has of late been making news for fairly negative reasons. Here's a choice quote from the prospectus: "The PowerShares DB Crude Oil ETNs are riskier than ordinary unsecured debt securities and have no principal protection." On a more technical point, the ETN is exposed to contango - though some attempt is apparently made to minimize impact - and if you check the NYMEX charts with any regularity, you've seen how large the price spreads have become. An aside: USO also suffers from the same contango problems and as long as this condition exists and if oil stays relatively flat in the front month, there will be steady erosion as the contracts are rolled.