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Which Oil-Tracking ETFs Outperformed US Crude Oil’s Fall?

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Oil ETFs

On October 26–November 2, the United States Oil ETF (USO) and the United States 12-Month Oil ETF (USL) fell 7.1% and 6.4%, respectively. The ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 13.9%. These ETFs track US crude oil futures.

US crude oil December futures fell 6.6% last week. USL outperformed US crude oil’s decline. USO holds active US crude oil futures, while USL holds US crude oil futures’ deliverable for each of the following 12 months. UCO tracks twice the daily changes of the Bloomberg WTI Crude Oil Subindex.

A fall in oil prices could be a concern for oil-weighted stocks. California Resources (CRC), Whiting Petroleum (WLL), and Denbury Resources (DNR), the weakest among the oil-weighted stocks, fell 4.4%, 5.2%, and 24.8%, respectively, last week.

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Long-term returns

Between February 11, 2016, and November 2, 2018, US crude oil active futures rose 140.9% from their 12-year low. Meanwhile, oil-tracking ETFs USO, USL, and UCO rose 66.5%, 68.7%, and 103.3%, respectively. A negative roll yield, which occurs when expiring futures’ contract prices are lower than the following month’s futures contract prices, might have caused the lower returns. UCO’s actual and expected returns could also be different due to daily price changes. In a cost-of-carry model, ETFs’ underperformance due to negative roll yields reflects storage costs.

As of November 2, US crude oil futures for delivery between December 2018 and July 2019 closed in ascending order, which could be a negative sign for these ETFs’ returns.

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