Greg Newton over at the NakedShorts blog has highlighted a huge defect in the new Claymore Macroshares oil ETFs today. Recall, this is the paired ETF, with one tracking the price of an oil futures contract (under the symbol UCR) and the other doing the opposite (under the symbol DCR). The idea was to cut the costs of actually having to manage a portfolio of futures contracts and instead just have assets switched back and forth through a derivatives contract between the two ETFs.
Well, as Newton points out, the sponsors failed to account for the fact that there might be a lot more investor interest on one side of the trade than the other. In the early going, in fact, there's been about five times more volume in the UCR than the DCR shares. Oops. Complications also arise from the fact that when the funds' benchmark futures contract expires, the funds are supposed to track the following month's contract. But the futures market has been anticipating a rebound in oil prices, creating a bump up in the price of futures contracts that mature later.
Typically, ETFs as a class have traded very close to their net asset value per share. That's because, unlike closed-end funds, institutional investors can turn in shares for the underlying assets or create new shares by exchanging the assets. That hasn't been happening it seems with the Claymore Macroshares. As of last Friday, UCR was trading at a price almost 12% above the level of its net asset value and DCR was trading at a 5% discount. On at least one day this week, the fund shares didn't even moved in the correct direction. The futures contract for oil that the two are supposed to track lost 3.4% on Tuesday, so UCR should have lost a similar amount with DCR gaining. Instead, UCR lost only 2.3%, a third less than the benchmark, and DCR also lost 2%, Newton points out.
There may be a variety of lessons to be drawn, but first and foremost I'd say that investors should avoid new ETFs based on unusual structures until the funds have seasoned a bit and demonstrated that they'll work as advertised.