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DBO: A Positive Roll Yield Strategy

Published Thu, 10 Oct 2019 06:06:55 -0400 on Seeking Alpha

Despite the recent volatility in shares, on a year-to-date basis, the Invesco DB Oil ETF (DBO) has delivered a strong 9% return in a move which has bested many rival oil ETFs. This strength in DBO has been driven both by its strong roll yield methodology as well as underlying bullishness in the crude markets. It is my belief that in the coming months, DBO will continue to perform with shares hitting fresh highs.
The Instrument Prior to jumping into an analysis of the crude markets, let's take a glance at the underlying methodology of DBO itself. DBO is one of my favorite crude oil ETPs in that it follows a methodology which specifically tries to maximize roll yield using the DBIQ roll yield methodology.
The DBIQ methodology is one of the more noteworthy methodologies employed by crude ETPs in that it seeks to maximize the effects of a backwardated roll or minimize the effects of a contango roll. To understand the effects of roll yield on the performance of a crude oil ETP, look no further than USO.
USO is the "granddaddy" of the crude oil space with one of the largest market caps, greatest liquidity, and longest lifespan. USO is famous (or infamous) for its roll strategy in that it is incredibly simple: two weeks before expiry, USO rolls exposure into the second-month futures contract and holds exposure until the next rolling period. That's it. The long-term performance of this strategy will be massively skewed depending on the specific structure between the first- and... Read more