ProShares launches ‘K-1 free’ actively managed crude oil ETF

Sep 30th, 2016 | By | Category: Commodities

US-based exchange-traded fund provider ProShares has launched the first crude oil ETF in the US to deliver 1099 tax forms to the investor instead of the less desirable K-1 tax form. The actively managed ProShares K-1 Free Crude Oil Strategy ETF (Bats: OILK) is registered under the Investment Company Act of 1940, unlike other crude oil ETFs, which are commodities partnerships.

ProShares launches actively managed crude oil ETF free from K-1 tax reporting

Structured as an investment company rather than a commodity partnership, the ProShares K-1 Free Crude Oil Strategy ETF (Bats: OILK) allows investors to avoid the problematic K-1 tax form.

Michael L. Sapir, Co-Founder and CEO of ProShares Advisors, commented: “Many investors want to invest in crude oil with the convenience of an ETF, but all other crude oil ETFs involve complicated tax reporting. OILK is the only US ETF that lets investors get crude oil exposure but skip the K-1 tax form.”

Investors tend to find K-1 tax forms problematic for two reasons. First is its lack of simplicity relative to the 1099 tax form. Whereas investors may usually report interest or dividend income as a single-line item on a 1099 tax form, K-1 forms are significantly more extensive and require a thorough breakdown of income earned by the partnership, including interest, dividends, royalties, capital gains, and ordinary business income.

Secondly, due to the concurrent tax deadlines for partnerships and individual investors, many partnerships do not send out K-1 tax forms until just before the deadline. This often forces investors to apply for extensions in their tax reporting.

The ETF provides exposure to the West Texas Intermediate crude oil futures market. The fund’s strategy seeks to outperform traditional index-based strategies by actively managing the rolling of crude oil futures contracts. ‘Rolling’ refers to the selling of a futures contract as it nears its expiration date and replacing it with a new one that has a later expiration date.

Many new index-based commodity ETFs are also beginning to utilise “optimised rolling strategies” in an effort to enhance returns. The choice of futures contract usually depends on the shape of the underlying commodities’ futures curve. When the curve is in ‘contango’ (where the spot price is lower than the forward price), an optimised rolling strategy would invest in futures contracts further out where the futures curve is shallower, minimizing the effects of value erosion over time. In times of ‘backwardation’ (where the spot price is above the forward price), an optimised rolling strategy would invest in front month futures contracts to maximise the rolling benefit over time.

The fund is currently invested in futures contracts expiring in November 2016.

It has a total expense ratio (TER) of 0.65%.

European-listed exchange-traded commodities providing optimised exposure to crude oil futures contracts include offerings from UBS and ETF Securities.

The UBS CMCI Oil ETF (SIX: OILUSA) tracks the UBS Bloomberg CMCI WTI Crude Oil USD Index. The fund extends beyond short dated futures contracts and diversifies investment across the maturity curve. It has a TER of 0.26%.

ETF Securities offers a range of ETCs targeting Brent crude or WTI futures exposure. These ETCs provide exposure to futures contracts expiring in 3-months, 1-year, 2-years, or 3-years, thereby providing investors with the flexibility to manage their futures curve strategy. Each has a TER of 0.49%.

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