Based on Total Returns, DBO Beats Other Oil ETFs

by: Hard Assets Investor March 05, 2008 | about stocks: DBO / OIL / USL / USO    
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By Brad Zigler

Paradoxically, the worst-performing oil ETF may actually be the best. When you add in distributions, that is.

Yesterday, we took dipstick in hand to gauge the performance of oil-based ETFs and ETNs ("Monthly Oil Check,") and saw one portfolio, the PowerShares DB Oil Fund (AMEX: DBO), grossly underperforming competing funds and spot oil itself.

And if you look at price appreciation alone, that analysis holds up. But factor in distributions and the table is turned on its head. A distribution of $1.28 per share (3.7% of the then-current market price) was made to DBO holders December 17, 2007. Counting that, on a total return basis, DBO actually betters its peers by a substantial margin.

So, the question follows: From where do these performance-enhancing distributions come?

One source is the proprietary "optimum yield" roll methodology that Deutsche Bank - DBO's portfolio manager - employs. Deutsche Bank's algorithm searches for the best-yielding delivery month over a 13-contract horizon in which to roll expiring futures.

Additionally, there are interest earnings and gains passed through to shareholders from gaming the 3-month Treasury Bill market. T-bills are used to collateralize the futures contracts in the DBO portfolio.

The bottom line? There's a lot of return in the DBO portfolio that are rather opaquely earned. As the trading rules for rolling and managing the collateral portfolio are proprietary, one can't reliably gauge their performance in the future. The gains, or losses, realized aren't directly tied to vagaries in the price of spot oil.

Then there's the tax question. How much of these outsized gains can actually be retained after dealing with Uncle Sam?

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This article has 2 comments:

  •  
    Mar 08 12:44 PM
    The $1.28/share distribution made by DBO in December 2007 was characterized as a non-taxable return of capital (keep in mind that DBO is organized as a commodity pool; holders receive K-1 returns).
    Reply | Link to Comment
  •  
    Mar 08 01:24 PM
    check out DBE...
    Reply | Link to Comment
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