Monday, 30 October 2017

Oil Trading

An Educational Article

BNO: United States Brent Oil Fund ETF
The United States Brent Oil Fund (NYSEARCA: BNO) is an exchange-traded fund (ETF) designed to provide investors with exposure to Brent oil. Brent oil serves as an alternative to the Western Texas Intermediate crude oil benchmark. Brent oil and WTI crude oil have different levels of supply, so Brent oil and WTI crude oil differ in price.

To track the daily price movements and provide exposure to Brent oil, the fund holds front-month ICE futures contracts on Brent crude oil. For example, as of Aug. 3, 2015, BNO holds 1,257 ICE Brent crude oil futures contracts that expired in September 2015 at $49.52, and the total market value of this holding was $62.25 million. The fund also holds various U.S. Treasury securities and cash in U.S. dollars.
BNO's benchmark is Brent Crude Oil PR USD, which is measured by the daily fluctuations in the price of Brent crude oil futures contracts traded on the ICE Futures Exchange.

The United States Brent Oil Fund is listed on the New York Stock Exchange Arca, and investors, trader and speculators can trade the ETF on multiple platforms. The general partner is United States Commodity Funds LLC, the administrator is Brown Brothers Harriman &; Company and the distributor is ALPS Distributors Inc.

Since the United States Brent Oil ETF must change the composition of its futures contracts as they approach the expiration date, the fund must roll its contracts by selling the near-month Brent crude oil futures contracts and buying the Brent crude oil futures contracts expiring the next month. This makes BNO sensitive to the shape of the Brent crude oil futures curves. If Brent crude oil futures are in contango, it can cause a negative roll yield, which can lead to losses.

Given the average expense ratio of the BNO category of commodities energy is 0.57%, BNO has a high expense ratio of 0.9%. This can be attributed to rolling of futures contracts. The expense ratio does not include broker fees.

Suitability and Recommendations
Since BNO tracks the prices of Brent crude oil, investors should pay attention to the futures prices of Brent crude oil, geopolitical risks, weather-related news, the monthly EIA Short-Term Energy Outlook and the weekly EIA Petroleum Status reports. Investors and potential investors should pay particularly close attention to the fluctuations of the supply of Brent crude oil every week. Like all commodities, Brent crude oil is affected by the levels of supply and demand.
When the supply of Brent crude oil is low, Brent crude oil prices increase, and the opposite is also true.

As of June 29, 2015, based on trailing five-year data, BNO had an alpha (against the MSCI ACWI NR USD Index) of 0.31, a beta (against the MSCI ACWI NR USD Index) of 1.29 and a Sharpe ratio of 0.04. Based on modern portfolio theory (MPT), the BNO's alpha indicates it outperformed the MSCI ACWI NR USD Index by an annualized 0.31%. The fund's beta indicates it is theoretically 29% more volatile than the MSCI ACWI NR USD Index; this may indicate BNO carries less risk. BNO's Sharpe ratio indicates the fund has been providing investors with an adequate return given the amount of risk taken.

BNO is a high-risk, high-reward play and offers enough liquidity for most investors. However, the fund is not suitable for everyone due to its specialized exposure to Brent crude oil. The fund may not be suitable for active day traders due to its low average share volume.

According to MPT, BNO is suitable for value investors, traders and speculators who believe Brent crude oil prices are poised to rebound. Due to the 57.19% drop in BNO over the past year as of July 31, 2015, investors who implement a value investing strategy may view the fund as undervalued and believe the supply of Brent oil will decrease over the next few years, causing BNO to rebound above $40.

Reference: Steven Nickolas

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