Why USO Is Underperforming Crude Oil



USO’s performance

From May 10 to May 17, 2017, the United States Oil ETF (USO) has risen 3.3%. But, during the same period, WTI (West Texas Intermediate) crude oil (DBO) (USL) (OIIL) June futures rose 3.7%. USO tracks WTI crude oil futures.

On February 11, 2016, crude oil fell to its 12-year low. Between February 11, 2016, and May 17, 2017, crude oil active futures have risen 87.2%, while USO rose ~27.1% over this time period.

Similarly, between June 20, 2014, and May 17, 2017, US crude oil active futures have fallen 54.3%, but USO fell ~74.1%. On June 20, 2014, oil prices entered an almost two-year downturn from their peak.

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So, USO has underperformed crude oil active futures for a long time because of the small losses it suffered while changing its exposure from expiring crude oil futures to active crude oil futures. Due to the contango structure in the futures market that we discussed in the previous part, the fund had to sell lower priced futures and buy higher-priced futures at every expiry.

On May 17, 2017, crude oil futures contracts out to January 2018 traded at progressively higher prices.

Energy sector exposure

For alternatives to ETFs that offer direct exposure to the energy sector such as USO, investors can consider the following ETFs:

  • 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)

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