Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Minyan Mailbag: Tracking Crude and Tracking Error


It isn't error - just flaws in the fund's design.

Professor Warner,

I own some of Powershare DB Crude ETN (DXO). I want to make a long-term investment in Oil, but I would rather go for a bigger gain than USO. Recently, crude is around $40 per barrel, and DXO closed around $2.55 on December 5th. Knowing that DXO tracks -200% or +200%, what happens if oil goes down to $20 per barrel (-50% from $40)? Does that mean this DXO will be $0 (minus 100%)?

Will this ETN implode? I know the ETN tracks indexes, and depends on the credit of the bank that issues the note. But if there's a danger of DXO being wiped out at $20 per barrel, I'm a little worried that the money I've already invested in DXO will be wiped out as well. I'm long for oil, so I have no problem with the current downturn, but if it can be $0 (a wipe-out), then I
am a little worried. Could you explain how DXO works?

Thank you so much for Minyanville's guidance.

- Minyan JJ

Minyan JJ,

The ETN tracks futures contracts on light sweet crude oil (WTI), and reflects the performance of crude oil.

And guess what? DXO has beaten expectations! Crude is down something like 70% in the past 6 months, and DXO has only lost 90%. Woo-hoo!

And it can never get to 0, unless crude drops over 50% in one day. Remember - this is reset each day.

With all that being said, I believe they do de-list somewhere along the way. But that too is above zero. So you're probably pretty close to a floor in DXO. Which I realize is a very bold statement about something with a full of "2." Maybe they can turn it into 3x crude, then ride a little oil gusher.

And since we've returned to the topic of double leverage, let me clarify the idea of tracking error, which I think is being increasingly misused to describe what happens to, say, DUG, which has gone nowhere amid an implosion in IYE, the ETF it ostensibly tracks.

That's not a tracking error - it's just the way the fund is designed. It's Compounding Gone Wild. Double-leveraged ETFs do no worse a job of tracking than, say, IYE itself, which tracks the Dow Jones Energy Index.

It's just the design itself that's flawed.

Professor Warner
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos