One Last ETF Simulation: UHN (Heating Oil)
A nice feature of some futures-based ETFs is that, through a bit of simple math, we can simulate how the ETF would have performed historically with remarkable accuracy. Previously I’ve shown this with VXX (1-month VIX) back to 2004, UNG (natural gas) to 1994, and USO (crude oil) to 1985.
One last ETF to add to that list: UHN which tracks heating oil futures. In the graph below I’ve shown my estimate for UHN (red) versus the spot price for heating oil (grey) all the way back to 1980.
When the ETF (red) underperforms spot (grey) futures are likely contangoed, and vice-versa.
Note that we don’t see nearly the same drift from spot in UHN as we saw in the other ETFs (meaning the futures term-structure tends to be flatter).
How accurate is the estimate?
The graph below shows the period of time in which the estimate (red) and actual ETF returns (blue) overlap.
For a number of reasons, it’s impossible to perfectly simulate futures-based ETF returns, but based on the close fit, I’m confident that we’re well within the ballpark.
In a previous post I showed that (unlike VXX, et al.) blindly following the futures term-structure (going short when contangoed and long when in backwardation) doesn’t work over the long-term with UNG (natural gas) or USO (crude oil).
As you can probably guess based on how closely UHN tracks spot, the same is doubly true here.
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