Crude oil is arguably the most important commodity in the world, as the product and its derivatives make their way into virtually every application of modern life. Despite its popularity and widespread use, there are several misconceptions about the various types of oil, particularly the distinction between Brent oil and WTI. Brent oil is most often extracted and consumed in Northern Europe, giving traders a different way to play the crude market. Although Brent is sometimes overshadowed by WTI, many investors believe that Brent actually offers a better global benchmark for oil [for more Brent news and analysis subscribe to our free newsletter].
Since Brent is already used as the primary benchmark in several major oil producing regions and its demand continues to rise across the globe, its popularity as a viable and lucrative trading instrument has made the commodity one of the most heavily traded futures contracts on the market. And thank to the rapidly developing world of ETFs, investors now have access to Brent oil futures exposure through a single equity ticker.
The United States Brent Oil Fund (BNO) made its debut in June of 2010, making it the first fund to exclusively focus on the commodity. To this day, it remains as the only exchange-traded product to offer non-leveraged and non-inverse exposure; VelocityShares’ DOIL and UOIL allow investors to make leveraged plays on the Brent futures market. Over the years, BNO has been able to gain a fair amount of traction among niche investors, and as such it has accumulated nearly $54 million in total assets and changes hands and average of 47,000 times a day [see also Four Little Known Factors Driving the Price of Crude Oil].
BNO’s investment objective is relatively simple: the fund is designed to track in percentage terms the changes of the price of Brent oil. To accomplish its goal, BNO invests in near month futures contracts listed on the Intercontinental Exchange (ICE). Investors should be aware that this strategy will not be able to deliver returns that are exactly correlated to spot prices. Furthermore, funds like BNO that invest in near-month contracts are more likely to exhibit contango and backwardation, which could have significant impacts on bottom line returns.
Below are the quick stats (as of August 2012) to help investors get a better feel for this unique ETF.
- Issuer: US Commodity Funds
- Expense Ratio: 0.75%
- Inception: 06/02/2010
- Total Assets: $53.5 M
- Average Daily Volume: 47,000
Who Should Use BNO
Although BNO is publicly available to anyone with a trading account, it is not a product that is intended for everyone. First and foremost, BNO should not be used by long-term, buy-and-hold investors: positions in futures-based products, like BNO, can quickly turn sour and should be monitored frequently. Instead, BNO will be most appropriate for active and niche investors who already have a firm grasp on the energy market [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].
As with all commodity investments, holders of BNO must stay on top of the latest developing trends and headlines in the industry, as anything from health of the economy to heightened geopolitical tensions can significantly impact the price of Brent oil. Investors should also focus on news from the EMEA region since these countries use Brent oil as their leading benchmark of crude oil prices. For those of you who meet the aforementioned requirements, BNO will be a great way to take advantage of the market, allowing you to play the commodity in a way that would be relatively expensive and difficult to implement on your own.
Disclosure: No positions at time of writing.