How Oil ETFs Are Reacting to Oil’s Rise




Between November 3 and November 10, 2017, the United States Oil Fund LP (USO) rose 2.1%, only ten basis points above the gain in US crude oil December futures. USO’s objective is to follow US crude oil near-month futures.

The United States 12-Month Oil Fund ETF (USL), which aims to follow US crude oil futures contracts for the next 12 months from the near-month futures contracts, rose 2.9% during this period.

However, the ProShares Ultra Bloomberg Crude Oil ETF (UCO) has produced twice the returns of US crude oil active futures. UCO rose 4.2% during this period and was the outperformer on our list of oil ETFs.

February 2016

On February 11, 2016, US crude oil (DBO) (OIIL) active futures were at their lowest in the last 12 years. Between February 11, 2016, and November 10, 2017, US crude oil active futures rose more than twofold. However, USO, USL, and UCO rose 42.9%, 40.8%, and 63.4%, respectively, during this period.

The negative roll yield could have limited the upside in these ETFs. The two consecutive futures contracts’ price difference could be the main factor behind the roll yield. So, if active futures are priced lower than the following month’s contract, then these ETFs could incur a loss.

For UCO, the compounding of its daily price variation over a long-term period could cause a deviation between its actual return and its expected return.

On November 10, 2017, US crude oil futures contracts prices as of April 2018 are in ascending order. Read Futures Spread: Is the Oil Market Tightening for more information.

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