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Are Oil ETFs Declining More Than Oil Is Falling?

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Oil ETFs

Between January 26 and February 2, 2018, the United States Oil ETF (USO) fell 1.5% compared to a 1% fall in US crude oil March futures for that same period. USO monitors the performance of US crude oil active futures.

The United States 12 Month Oil ETF (USL) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO), which also monitor US crude oil futures performances, fell 2.3% and 3.1%, respectively, in the week ended February 2, 2018. USL could be affected by the fluctuations in all crude oil futures contracts for delivery until February 2019.

UCO’s fall, which is more than three declines in US crude oil futures, could be understandable because it monitors twice the daily changes of the Bloomberg WTI (West Texas Intermediate) Crude Oil Subindex.

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ETF performances

Between February 11, 2016, and February 2, 2018, US crude oil active futures gained 149.7% from their 12-year low. Below are these oil ETFs’ performances for that period:

  • USO: 63.2%
  • USL: 56.1%
  • UCO: 110.6%

Oil ETFs’ underperformances could be due to the negative roll yield. Apart from fund expenses, if expiring futures traded less than the following month’s futures, then an additional cost during rollover could limit the returns from these oil ETFs. However, as of February 2, 2018, US crude oil futures through February 2019 were priced in a descending pattern, which could boost these oil ETFs.

UCO’s actual returns and the expected returns could vary because of the compounding effect of daily price changes.

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