Investors piling into passive funds which track the oil price have been warned they may not be getting what they bargained for.
David Coombs, head of multi-asset at Rathbone Unit Trust Management, has said few products track the actual price of the commodity and instead are usually based on complex derivatives linked to the market’s expectation of where the oil price will go.
Analysis from ETF Securities found inflows into oil-related ETPs hit a record high of $3.2bn (£2.1bn) in the fourth quarter of 2014.
And the bargain hunting has only increased in 2015, as last week the same company found the previous week’s inflow into oil ETPs was $76.9m, the highest weekly inflow for four years.
But Mr Coombs has cautioned investors to closely examine what kind of product they are buying because no ETP tracks the actual current spot price of oil.
Mr Coombs said he was “not aware of any products that gives direct access to the oil price” and that investors in oil ETPs will instead be making complicated bets on the future of oil prices, with potentially disastrous results.
He said many clients had approached him pressing for him to invest in oil, but he said buying a basket of oil stocks or an energy fund was likely to be a better bet than an oil price tracker.
Oil ETPs give investors access to the oil price at some point along the “curve” of its future price.
For instance, the futures curve is saying the price of oil will be roughly $60 in January 2016, so an investor buying a 12-month oil ETP will be buying that price.
But if the spot price rises from $45 to $60 in the next 12 months, investors will not pocket that 33 per cent rise.
Instead, their return is based on what the futures curve says the price of oil will be in January 2017. If that price is also $60, it means investors will have made no money from the ETP.
If the 12-month future price is lower, then investors will have lost money.
Investors can access shorter-term ETPs, buying the price for one month or three months in the future, but are then more exposed to shorter term price swings, called ‘roll-risk’.
For instance, if an investor bought a three-month ETP priced at $50 but at the end of that period the expectation is that in another three months the oil price will be $45, the investors will lose the difference between those two prices if they want to ‘roll’ the ETP on for another three months.
Mr Coombs said the last time he bought a listed oil tracker was in 2008, when the oil price collapsed during the financial crisis.
He bought a 12-month tracker but said while he made a profit, it was only half of the rise in the actual spot price through the life of the investment, though he said he knew other managers who had gone for shorter-dated products which lost money.