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Which Oil ETF Could a Good Bet on Rising Oil Prices?

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Oct. 31 2017, Published 10:13 a.m. ET

ETFs’ price performance

On October 20–27, 2017, the United States Oil Fund LP (USO) rose 3.9%, while US crude oil (DBO) December futures rose 4%. USO follows US crude oil near-month futures.

The United States 12-Month Oil Fund ETF (USL) tracks US crude oil futures contracts 12 months out, starting with near-month futures contracts. It rose 3.1% during this period.

However, the ProShares Ultra Bloomberg Crude Oil ETF’s (UCO) returns are almost double the rise in US crude oil. UCO rose 7.7% during this period and outperformed US crude oil and ETFs like USO and USL. UCO’s objective is to capture twice the daily changes of the Bloomberg WTI Crude Oil Subindex. So, investors who are confident of oil’s rise in the short term can look at ETFs with leveraged exposure to capture its gains.

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Since February 2016

On February 11, 2016, US crude oil (OIIL) active futures were at the lowest closing price in 12 years. Between February 11, 2016, and October 27, 2017, US crude oil futures rose 105.6%. However, USO, USL, and UCO rose 35.6%, 33.2%, and 47.2%, respectively, during this period.

The negative roll yield would have made these ETFs underperform US crude oil futures. For UCO, the compounding of its daily price performance over a long duration could have caused the difference between its actual return and its targeted return.

Spread

The difference between two successive futures contracts will determine the roll yield. When a US crude oil active futures contract’s expiry is within two weeks, USO and USL shift their holdings to the following month’s futures contract. So, if the expiring contracts are priced less than the following month’s contract, the ETFs’ returns might fall due to the negative roll yield.

On October 27, 2017, US crude oil futures contracts to March 2018 settled at progressively higher prices. Read Futures Spread: Why Oil Is Looking Stronger to learn more about the spread.

Next, we’ll analyze ETFs’ performances that are meant to track natural gas futures.

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