The number of exchange-traded funds [ETFs] available to investors has increased exponentially in recent years. While the growth can seem overwhelming because it is impossible to track and trade all of the ETFs available today, there is some good news. Individual investors and options traders now have a wide array of new tools available that haven’t been offered before. Funds that track commodities are one recent example.

The United States Oil Fund (USO) was one of the first commodity ETFs. The USO started trading on April 12, 2006. However, no options were listed on the fund for more than a year for regulatory reasons. Then, on May 9, 2007, a milestone was achieved when the Chicago Board Options Exchange [CBOE] listed options on the USO and ten other commodity funds. It was the first time investors could trade options on commodities within their stock brokerage accounts.

Well, the US Oil Fund is not exactly a pure play on oil because it doesn’t hold barrels of crude. Instead, the USO is a registered commodity pool that invests in oil futures on the New York Mercantile Exchange [NYMEX], options on oil futures, and forward contracts. So, unlike most ETFs, the USO is actually a commodity pool rather than a fund registered under the Investment Company Act of 1940. Nevertheless, it is considered to be a very close proxy for the price of crude oil.

Over the past few months, the USO has been posting solid returns with the help of surging crude oil prices. On Monday, crude rose to record highs above $93.00 a barrel. At that level, crude oil is 86% above its 2007 lows near $50.00. Consequently, the USO has been rallying and is up 23.87% over the past 3 months. The USO is up nearly 16% this month alone. At the same time, two other ETFs that are designed to track the price of crude oil are performing well. As we can see from table 1, the PowerShares DB Oil Fund (DBO) and the Powershares DB Energy Fund (DBE) are both up approximately 18% since October. These two funds were also created to give investors a way of participating in the price moves in crude oil.

Table 1: Commodity Funds 1 and 3 Month Percentage Change (Through Oct. 29)

Crude oil isn’t the only commodity seeing big gains in 2007, gold is also. Consequently, the ETFs that track and trade the precious metal have been delivering solid returns. For example, the PowerShares DB Gold Fund (DGL) is designed to track the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold Excess Return Index, which is an index that tracks the price of the precious metal. The DGL is up 16.6% over the past few months.

While gold and energy have been ripping higher, the performance throughout the rest of the commodity markets has been mostly positive.  The United States Natural Gas Fund (UNG) is similar to the USO, but offers a way to trade natural gas. It is up 7.1% so far this month. The PowerShares DB Agricultural Fund (DBA) gives investors a tool for trading agricultural commodities like orange juice, coffer, and cocoa. It has an 11.7% three-month gain. Silver has also performing well. The PowerShares DB Silver Fund (DBS) is up 8.7% since July 31. The only group that hasn’t participated in the recent rise in commodities prices is the base metals group. The PowerShares DB Base Metals Fund (DBB) is down 7% in October.

Figure 1: Powershares

Yet, while base metals have been weak, the overall trend in the commodities market has been bullish. Figure 1 shows the action of the PowerShares DBC Commodity Index Fund (DBC). The DBC holds a combination of base metal, agricultural and energy commodities. It is up 21.4% on the year. In addition, the trend could continue in 2008, as strong global demand, including from China and other emerging countries, supports commodity higher prices. Therefore, for options strategists looking for ways to play a market outside of equities, options on the DBC, USO, DGL, and the other commodity ETFs in Table 1 might be worth a closer look.   

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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