First annual rolling crude oil futures ETF lists in Hong Kong

May 16th, 2016 | By | Category: Commodities

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Hong Kong-based CSOP Asset Management has listed the city’s first exchange-traded fund to offer exposure to crude oil futures while rolling contracts only once a year. The CSOP WTI Oil Annual Roll December Futures ER ETF (stock code: 3135) started trading on the Hong Kong Stock Exchange on 13 May 2016.

CSOP to list first annual rolling crude oil futures ETF in Hong Kong

The annual rolling schedule of the CSOP WTI Oil Annual Roll December Futures ER ETF will serve to reduce rolling costs compared to more frequent rolling schedules during contango commodity markets.

The fund’s underlying index, the BofA Merrill Lynch Commodity index eXtra CLA Index, tracks the performance of December month WTI Futures Contracts. The ETF rolls over its contracts on an annual basis, which is intended to help investors enhance their returns compared to funds that adopt more regular rolling schedules by reducing transaction costs.

By utilising futures to obtain exposure to crude oil, investors are able to avoid the storage and transportation costs associated with direct physical investment in the commodity.

Melody He, Head of ETF and Index Solutions at CSOP, commented in a statement: “As one of the first ETF issuers to bring oil futures ETF product to the Hong Kong market, we spend a lot of time on figuring out what is the best for investors. Smart investment solutions are always our priority in relation to product design. I am confident in this product as the efficient annual rolling strategy adopted by CSOP Crude Oil ETF will seek to bring a better performance to investors than the conventional monthly rolling futures strategy in a longer term.”

Historically, the underlying index of the CSOP WTI Oil ETF significantly outperformed the conventional front-month monthly-rolling index in both bull and bear markets by more than 35% in the past ten years. (Source: Bloomberg, as of 31 March, 2016)

Investors should be aware that the impact of rolling costs on portfolio value not only depends on the frequency of rolling but also on the shape of the futures curve. If each subsequent month on the futures curve is priced higher than preceding months, the commodity is said to be in contango. In contrast, if subsequent months are priced lower than preceding months, this situation is referred to as backwardation.

During contango an ETF with a monthly rolling schedule will find the forward month futures contracts cost more than the current month, thereby reducing the number of contracts it could purchase. The compounding nature of this effect may result in significant losses to the investor over time. Conversely during backwardation the forward month futures contracts trades at a discount to the current month, meaning the ETF is able to buy a greater number of contracts at each rolling period. Over time this may represent a significant gain to the investor. In this way the most suitable ETF for each investor may depend on his risk aversion as well as his expectations regarding the futures curve.

Regardless of the mechanics of investment, which may seem overly complicated, exposure to the crude oil market may reap attractive returns in coming years due to current structural factors. In recent years, the shale oil revolution, together with the increase in supply and geographical game played between oil production countries to fight for market-share, pushed the crude oil price down from $116/barrel in 2014 to below $40/barrel, losing almost 70% in less than two years. (Source: Bloomberg, as of 31 March, 2016). The crude oil price is now lingering at a 10-year low, below the breakeven points for most crude oil producers. If prices do rebound in coming years, ETFs such as the newly launched CSOP WTI Oil ETF may be well placed to capture the growth potential.

This is the ninth ETF listed by CSOP in Hong Kong. The fund has attracted approximately $40m in initial investment, resulting in it becoming the largest ETF listed in Hong Kong to track the crude oil market. A total expense ratio of 1.08% applies.

Ms. Ding Chen, CEO of CSOP added: “I am very proud of what we achieved in the past years and we are very confident that we will bring more excellent ETF products to Hong Kong and global investors.”

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