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Measuring the Fall in US Crude Oil ETFs Last Week

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Oil ETFs

On March 29–April 6, 2018, the ETFs that follow US crude oil futures had the following performances:

  • The United States Oil ETF (USO) fell 4.4%.
  • The United States 12 Month Oil ETF (USL) fell 3.3%.
  • The ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 9.1%.

On March 29–April 6, 2018, US crude oil May futures fell 4.4%. In Part 1, we discussed the factors behind oil’s fall. USO holds active US crude oil futures contracts. USL holds US crude oil futures contracts’ deliverable for each of the following 12 months. UCO tracks twice the daily changes of the Bloomberg WTI Crude Oil Subindex on a daily basis.

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Long-term ETFs’ returns

Between February 11, 2016, and April 6, 2018, US crude oil active futures rose 136.8% from their 12-year low. During this period, oil-tracking ETFs like USO, USL, and UCO rose 56.5%, 54.2%, and 92.4%, respectively.

These ETFs have underperformed US crude oil’s rise since February 11, 2016. The negative “roll-yield” might be behind the lower returns. A negative roll-yield is caused when expiring futures contracts’ prices are lower than the following month’s futures contracts’ prices. UCO’s actual and expected returns could be misaligned because of the compounding effect of price changes on a daily basis.

On April 6, 2018, the closing prices of US crude oil futures contracts for delivery between May and June 2018 settled progressively higher. The price pattern might limit the returns in USO, USL, and UCO compared to crude oil futures.

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