Thursday, February 12, 2009

Correction and addendum to Tuesday's blog

As many of you know, I'm a contributor to SeekingAlpha, a website that is a compilation of many financial viewpoints dedicated to helping investors and traders gain insight into the financial markets. I feel especially honored to have my work included as their readers are savvy, sophisticated, and well-informed. Their ranks span the home investor to the institutional portfolio manager, analyst, and trader. In short, they're good and they know what they're talking about. And when they comment on my articles, I listen.

The DUG is out
I had several great comments concerning Tuesday's blog that I feel I should address here. The first one concerns the makeup of the DUG, the double inverse oil and gas ETF. I was wrong in my assumption that the fund tracks the price of oil and gas. I tried to find the fund holdings but since neither MSN Money nor Powershares, the ETF's fund family, listed any I erroneously assumed that it was tracking an index.

This is not the case. The Dow Jones Oil & Gas Index that it tracks is made up of oil and gas producers along with oil equipment, services and distribution companies. In short, the DUG is based on equities not the commodities, and as such I was essentially comparing apples to oranges. (Well, maybe lady apples to Rome Beauties as we're still talking about the performance of the oil and gas sector.) That was my mistake.

The DTO is in
Right now there are 131 ETFs involved in natural resources. I have ten on my oil and gas list which I must admit hasn't been updated in a while, so I missed the DTO which is a double inverse fund that came into being last June. It's specifically designed to track the spot price of oil* and is the correct fund to use if you're really bearish on crude. You can see from the charts below that the DTO does indeed accurately mirror the inverse movement of the USO, the US Oil Fund.





Since oil peaked on 7/11/08, the USO has lost almost 80% while the DTO has gained more than 800%! Wowie!

Why the DUG is bad and the DTO is good
In Tuesday's blog we saw that market volatility is a major influence on the DUG. So, how come volatility isn't an issue with the DTO? The difference here is that the DUG is based on an index of stocks while the DTO is based solely on the price of oil and is thus independent of the volatility that affects the equity markets.

Summary
Thanks to the acumen of those who commented on my article I was able to make this important correction. On a side note, I did receive a very misogynistic comment (from a fellow alum no less!) about how MIT is letting too many women graduate, among other things. A friend of mine who is in the media said that you know you've finally arrived when you get flamed in print. I guess Tuesday was my coming out party.

*The PowerShares DB Oil Fund (Symbol: DBO) is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Oil Excess Return™ and is managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the performance of crude oil.

Note that the DTO is not optionable.

1 comment:

super.quark said...

dr kris, DUG is a proshares family ETF. check it out: http://www.proshares.com/funds/dug.html?Index this is squark62 from seekingalpha.com.