About the Ultra or Ultra short EFT of Oil, Gold

yaobooyao

Recent some talks about the 'Contango' of Crude Oil, and its risk to ETF like USO, DXO.  Here is something I found in the Prospectus of ETF - UCO, 2x Oil ETF.

The presence of “contango” in the market prices of benchmark commodity future contracts will generally adversely affect the value of those Ultra Funds, and the presence of “backwardation” in the market prices of benchmark commodity future contracts will generally adversely affect the value of those UltraShort Funds.  In Funds that hold futures contracts, as the futures contracts near expiration, they are generally replaced by contracts that have a later expiration. Thus, for example, a contract purchased and held in August 2008 may specify an October 2008 expiration. For an Ultra Fund, as that contract nears expiration, it may be replaced by selling the October 2008 contract and purchasing the contract expiring in December 2008. This process is referred to as “rolling”. Rolling may have a positive or negative impact on performance. For example, historically, the prices of crude oil have frequently been higher for contracts with shorter-term expirations than for contracts with longer-term expirations, which is referred to as “backwardation.” In these circumstances, absent other factors, the sale of the October 2008 contract would take place at a price that is higher than the price at which the December 2008 contract is purchased, thereby creating a gain in connection with rolling. While crude oil has historically exhibited consistent periods of backwardation, backwardation will likely not exist in these markets at all times. The presence of contango (rather than backwardation) in crude oil at the time of rolling would be expected to adversely affect the Dow Jones—AIG Crude Oil Sub IndexSM and thus would adversely affect the value of the ProShares Ultra DJ-AIG Crude Oil, which tracks daily changes in the value of the Dow Jones—AIG Crude Oil Sub IndexSM, and positively affect the value of the ProShares UltraShort DJ-AIG Crude Oil which tracks daily changes in the value of the Dow Jones—AIG Crude Oil Sub IndexSM. Similarly, the
presence of contango in any other relevant benchmarks and related futures contracts of a given Ultra Fund would adversely affect the value of that Ultra Fund and positively affect the value of an UltraShort Fund.

Conversely, gold and silver units historically exhibit “contango” markets rather than backwardation. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months due to the costs of long-term storage of a physical commodity prior to delivery or other factors. The presence of backwardation (rather than contango) at the time of rolling in relevant benchmarks of a given UltraShort Fund would be expected to adversely affect the value of that UltraShort Fund which tracks daily changes in the value of the relevant benchmark and positively affect the value of that Ultra Fund which tracks daily changes in the value of the relevant benchmark.

Baruch

Ding!