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Is USO the Best Way to Track Oil’s Gains?

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Apr. 17 2017, Published 2:46 p.m. ET

USO’s performance

From April 6 to April 13, 2017, the United States Oil ETF (USO) rose 2.5%. In the trailing week, WTI (West Texas Intermediate) crude oil (DBO) (USL) (OIIL) May futures rose 2.9%. USO tracks WTI 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. They gained 102.9% from February 11, 2016, to April 13, 2017. During that period, USO rose ~39.3%. From June 20, 2014, to April 13, 2017, crude oil active futures fell 50.4%, while USO fell ~71.7%. The almost two-year downturn in crude oil prices started from a 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 small losses it suffered while rolling its exposure from lower priced expiring crude oil futures to higher priced active crude oil futures. Due to the “contango” structure in the futures market, USO has underperformed crude oil.

Investors should keep this in mind when using USO to track moves in WTI crude oil prices. On April 13, crude oil futures contracts out to January 2018 traded at progressively higher prices.

Energy sector exposure

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

  • 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)

In the next part, we’ll look at UNG’s performance compared to natural gas futures.

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