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Mississippi Bubble

Samsung ETFs Trust - Samsung S&P GSCI Crude Oil ER Futures ETF (3175.HK)

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I have a question, probably a rather easy one for some of the experienced traders here. But I am not and out of interest I'd like to ask your advise.

A friend of mine recommend me to buy Samsung Oil, it dropped by 46% and he told me it would be a great investment over time (span of a year or so) It sounds like a no-brainer, oil is low and at some point in the near future it should recover and go up again. 

I researched Samsung Oil and it looks as this is a ETF Crude Oil futures based, and more interesting has nothing to do with Samsung directly... instead just reflects the S&P GSCI index. (79% oil) ->

From previous discussion in this forum, I read that going Long with oil eft futures seems to inherit some issues for the trader. Do I understand correct, that etf commodity futures are primarily designed for short-term (up to 1 month) speculation? And does the contango (didn't fully understand yet) will eat my gains over time... due to storage and service fee for the commodity? 

Is there any solution to go long on oil without these negative effects? Obviously I could buy oil company stocks, but as I understand most of them will face serious financial trouble over the next months. 

Really appreciate your feedback! Thanks in advance. 

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Missisippi, since nobody really experienced answered so far a reply from another Newbie : There are indeed some "issues" with commodity ETFs, in particular with oil which trades exclusively in futures. For various reasons, buying an oil commodity ETF as a buy-and-hold strategy is not recommended. In general, a commodity ETF is always inferior to a stock ETF (or a simple stock) which gives you the same capital gain.

But this does not limit you necessarily to one month holding time for oil ETFs. It all depends on how the price develops. If you are banking on a 10% increase, an oil ETF is fine for a month, but you might not realize your whole return when it needs a year to make these 10%. If you are banking however on a 100% or 200% increase in a year... the "issues" won't matter much, you still make quite a bit of a gain.

However, buyer beware: just because Samsung dropped from 11 to 1.7, does not mean that it cannot drop even further. And a 50% loss is a 50% loss independent on where the course actually was. Second, most ETFs have trigger events which automatically **close** the ETF when the price drops too far in a day. Which means that when your ETF drops 80% in a day, you cannot hold and wait because it might go up again as you could for a stock. They have to close the ETF, pay you out (with 80% loss) and there might not be another ETF to invest in right away at that moment. (That's what happened to most of the leveraged ETFs right now.) ETF holding companies can also voluntarily trigger an ETF closure under certain conditions.

Thus: if you believe oil will go up 100% in the next year and you do not believe that we see another extreme drop... go for it. But of course, as always, you loose money when you are wrong.



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