Whatever Happened To The Xle-Uso Spread?

Recently Mr. Teetor, a subscriber of mine, has posted an enthusiastic comment on trading the XLE-USO spread that I suggested. While Mr. Teetor has a lot of success trading this spread, I must tell that I bring lost religious belief inward the cointegrating feature of this spread because of ii reasons:

1) The spread appeared to bring experienced a regime-shift since the historic backtest menstruation earlier August 2006: the out-of-sample functioning of the spread since so did non back upwards cointegration; and

2) The key declaration inward back upwards of cointegration betwixt XLE as well as USO cruel apart upon closer investigation.

The ii reasons are, I believe, intertwined. Unlike GLD (part of a much to a greater extent than cointegrating spread that I discussed as well as tracked inward my premium content area), USO does non genuinely concur commodity assets inward its portfolio. It holds nearby futures contracts inward oil. When the USO fund started trading inward Apr 2006, its cost per portion was really around the spot petroleum price. Now, however, USO is trading at virtually $53, acre spot petroleum cost is at virtually $70.6. How tin give the sack a fund that is supposed to reverberate petroleum cost diverge so much from it subsequently a yr as well as five months? The ground is that the petroleum futures marketplace has been inward contango since 2005 or so, i.e. far calendar month futures costs to a greater extent than than the nearby contracts, which results inward negative roll-yield for long seat inward petroleum futures. In the age from which the XLE-USO cointegration relation was established, petroleum futures marketplace exhibited backwardation: far calendar month futures cost less than nearby futures. This authorities shift partially explains the breakdown of the cointegration relation inward the acquaint out-of-sample period.

The lesson I bring learned from all these is to avoid analyzing cointegration relation when either side of a spread involves futures contracts at dissimilar points of the frontwards curve, at to the lowest degree on a time-scale when the shape of that crease mightiness change. (I argued earlier that XLE, the other side of the spread, tin give the sack hold out modeled every bit an average over the entire frontwards curve.) Meanwhile, the fund managing director of USO would genuinely bring done investors a much meliorate favor past times getting their hands dirty, leasing some petroleum storage tanks as well as buying some existent petroleum assets rather than keeping their hands build clean as well as dealing inward futures contracts alone. After all, retail investors similar myself tin give the sack simply every bit easily purchase petroleum futures ourselves, but nosotros can't really good become out as well as rent an petroleum tank.