Why USO Investors Stand to Lose More than Oil



USO’s performance

From March 9, 2017, to March 16, 2017, the United States Oil ETF (USO) fell 1.6%. In the trailing week, WTI (West Texas Intermediate) crude oil (DBO) (USL) (OIIL) April futures fell 1.1%. USO is meant to track active crude oil futures.

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Does USO track crude oil futures well?

On February 11, 2016, crude oil active futures hit a 12-year low. USO rose ~29.6% from February 11, 2016, to March 16, 2017. During that period, crude oil active futures rose 86%.

From June 20, 2014, to March 16, 2017, USO fell ~73.7%, while crude oil active futures fell 54.5%. The nearly two-year downturn in crude oil prices started from their peak on June 20, 2014.

The above numbers show USO’s lower returns compared to crude oil active futures. The fund’s lower returns have been due to the small losses it has suffered while rolling its exposure to crude oil active futures. Active futures are higher in price than expiring futures contracts in the fund. Due to this contango structure in the futures market, USO has underperformed crude oil for the past few years.

Energy sector exposure

For exposure to the energy sector, you might want to look at energy ETFs that invest in oil and gas stocks. Such ETFs could be alternatives to ETFs that offer direct exposure to energy prices such as USO. Some energy ETFs include the following:

  • the Energy Select Sector SPDR ETF (XLE)
  • the PowerShares DWA Energy Momentum ETF (PXI)
  • the Vanguard Energy ETF (VDE)
  • the iShares US Energy ETF (IYE)
  • the Fidelity MSCI Energy ETF (FENY)
  • the SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Now let’s take a look at UNG’s performance compared to that of natural gas futures.


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