Between October 27 and November 3, 2017, the United States Oil Fund LP (USO) rose 3.1%—just ten basis points below the rise of US crude oil December futures. USO aims to track US crude oil near-month futures.
The United States 12-Month Oil Fund ETF (USL) follows US crude oil futures contracts one year out from the near-month futures contracts. USL rose 2.7% during this period.
But the ProShares Ultra Bloomberg Crude Oil ETF’s (UCO) returns were more than twice that of US crude oil last week. UCO rose 6.5% over this period, outperforming the above oil ETFs. UCO’s objective is to deliver two times the daily price fluctuations of the Bloomberg WTI Crude Oil Subindex.
On February 11, 2016, US crude oil (DBO) (OIIL) active futures plunged to their lowest in the past 12 years. Between February 11, 2016, and November 3, 2017, US crude oil futures more than doubled. However, USO, USL, and UCO gained 39.9%, 36.9%, and 56.8%, respectively, during this period.
These oil ETFs underperformed US crude oil futures because of a negative roll yield. Remember, the price difference between two consecutive futures contracts can impact the roll yield, and so if active futures trade at less than the following month’s contract, it could reduce these ETFs gains.
In the case of UCO, the compounding of its daily price changes over a long span may also be behind the deviation between its actual return and its expected return.
On November 3, 2017, US crude oil futures contracts to March 2018 settled at progressively higher prices. For more analysis on the oil futures spread, check out Market Realist’s series Is the Oil Market Balancing?