For the majority of people, heating oil is usually associated with the boilers and furnaces that are used to heat homes and businesses. The fuel is especially popular in parts of Northeastern U.S. and Canada, where natural gas and propane are either inaccessible or too expensive. But because heating oil is a low-viscosity petroleum product that is derived from crude oil, its prices are often closely tied to WTI crude. Furthermore, heating oil accounts for about 25% of the yield of a barrel of crude, the second largest allocation after gasoline [for more energy news and analysis subscribe to our free newsletter].
Although its contracts are not as popular as some of the other commodities listed on the NYMEX, heating oil futures can also be used as hedge against diesel and jet fuel prices, which do not trade as liquidly as heating oil does but are often a stable premium above NYMEX heating oil futures contracts. But for many investors, futures are too dangerous and come attached with too many complexities to be an appropriate allocation. Enter the United States Heating Oil Fund (UHN) from US Commodity Funds, an ETP that affords investors with futures exposure through an equity ticker.
Under the Hood of UHN
UHN made its debut in mid-2008 and to this day it remains as the only fund to offer targeted exposure to heating oil. Though it has not been able to grow as large as some of the other single-commodity ETPs, it has gained a fair amount of traction among niche investors. But unlike other hyper-targeted funds, UHN charges a relatively low expense ratio of just 0.60%, making it an alluring option for cost-conscious investors [see also 25 Ways To Invest In Crude Oil].
UHN’s investment objective is quite simple: the fund is designed to track in percentage terms the movements of the price of heating oil delivered to the New York harbor. To attain this goal, UHN invests in near month futures contracts listed on the New York Mercantile Exchange. Investors should be aware that this strategy will not be able to deliver returns that are exactly correlated to spot prices. Furthermore, funds like UHN 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 (10/16/2012) to help investors get a better feel for this unique ETF.
- Issuer: US Commodity Funds
- Expense Ratio: 0.60%
- Inception: 04/09/2008
- Total Assets: $7.2 M
- Average Daily Volume: 6,100
Who Should Use UHN
Although UHN is publicly available to anyone with a trading account, its use is not intended for all investors. UHN will probably be most appropriate for niche investors who already have a firm understanding of the energy market, those who come unprepared can get burned in a hurry. Like all other commodities, movements in heating oil prices are very trend-dependent and are also closely correlated with WTI crude. As such, investors must stay on top of the latest headlines surrounding this commodity and its parent, crude oil [see also Four Little Known Factors Driving the Price of Crude Oil].
The most important aspect about UHN that investors should remember is that at the end of the day, it still offers futures-based exposure, meaning that it will require someone who falls more on the active investing side. For those of you who meet the aforementioned requirements, UHN 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.