Are Oil ETFs Gaining from Higher Oil Prices?



Oil ETFs

Between January 19 and January 26, 2018, the United States Oil ETF (USO) rose 4.1%. It underperformed US crude oil futures by 40 basis points in this period. USO mirrors US crude oil futures in the near term.

The United States 12 Month Oil ETF (USL) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO), other ETFs that follow US crude oil futures, rose 3.1% and 8.3%, respectively, last week.

UCO’s larger rise makes sense given its objective to provide twice the daily fluctuations of the Bloomberg WTI (West Texas Intermediate) Crude Oil Subindex. USL captures the price performance of the US crude oil futures until February 2019.

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Between February 11, 2016, and January 26, 2018, US crude oil (DBO) (OIIL) active futures rose 152.3% after falling to their 12-year low on February 11. Oil-tracking ETFs’ returns during this period were as follows:

  • USO: 65.7%
  • USL: 59.8%
  • UCO: 117.4%

Oil ETFs have underperformed US crude oil futures because of the negative “roll yield.” This occurs when active futures’ prices are below the following month’s futures contract prices.

Moreover, for UCO, the compounding effect again increases the difference between the actual returns and the expected returns.

On January 26, 2018, US crude oil futures’ for the next 12 months had settled at progressively lower prices, a boost for these ETFs.


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