Claymore's Active Oil Sands ETF

Date: Wednesday, July 11, 2007
Author: Matt Hougan,

Claymore has once again blurred the lines between active and passive investing, launching a new Canadian oil sands exchange-traded fund (ETF) that smacks closely of active management.

The new Claymore/SWM Canadian Energy Income ETF (AMEX: ENY) launched on the American Stock Exchange (AMEX) on July 3. The fund is being marketed as the “first domestic opportunity to access the developing Canadian energy market,” which it is … and then some.

The fund will buy two types of securities: Canadian Royalty Trusts (CanRoys) and oil sands plays.

CanRoys are oil and gas companies that (for now) have a special tax status that encourages them to pay large dividends. Essentially, these companies can avoid taxation if they pass on their income directly to shareholders. The end result is large dividend yields, which often top 10% per year. These are thought of as a relatively “safe” way to play the energy markets.

Oil sands plays, in contrast, are generally exploration-stage companies looking to develop Canada’s vast oil sands fields. These fields are full of a mucky mix of oil and sand (hence the name), which can be difficult to process into oil, but which is eminently profitable if prices stay as high as they have been recently. The oil sands plays, as development-stage companies, are much more volatile than the CanRoys, and more sensitive to the price of crude: After all, if crude prices fall below a certain level, developing the oil sands will no longer make sense.

The active quirk of this fund is that it rebalances assets between the CanRoys and the oil sands plays on a quarterly basis, based on the current trend in crude oil prices that day. At the end of each quarter, the index checks to see if the price of crude is rising (above the moving one-year average) or falling (below the one-year average). If it’s rising, the fund invests 70% of its assets in oil sands and 30% in CanRoys. If the price is falling, it invests 70% in CanRoys and 30% in oil sands.

The idea is that the fund will boost its upside when prices are rising and cut exposure when prices are falling. That, of course, is fundamentally an active strategy: mechanistic, but active.

There’s no way to know how the product will perform from here. To be a success, the fund will have to be right on a number of points, including:

  • There must be a tie between price trends and the relative performance of the two asset classes.
  • The backward-looking trend analysis (examining price trends over the past quarter vs. the past year) must carry over into results for the next year.
  • For taxable investors, the tax consequences of rotating between the two exposures will be overcome by the inherent efficiency of the ETF. And for all investors, the costs of that turnover must not be overly large.

We’ll see.

For now, the bulk of demand will likely come from investors looking to get into the “hot” oil sands market.

The fund charges 0.65% in expenses.