Source, the investment bank owned platform for exchange-traded products, has launched a product tracking the price of oil.
Tracking the spot price of oil is difficult because investors cannot buy the underlying physical commodity. Traditionally they use the futures market, which leads to problems as futures contracts mature and have to be exchanged for later dated contracts.
This is fine when the futures curve is backwardated – the price of a contract to buy oil next month is higher than the price of a further-off contract – but when the market is in contango, as now, the investor has to pay more for a new contract than he/she will receive for the contract about to expire.
“You can’t get away from the shape of the oil curve,” said Michael John Lytle, director of marketing at Source.
Source’s exchange traded commodity is linked to the S&P GSCI Crude Oil Enhanced index which uses algorithms to manage its exposure to the yield curve. Even so Mr Lytle admitted there would be significant tracking error. ”
Rival ETF provider Lyxor listed a similar product on Euronext Paris in April.