USO Is a Broken Oil ETF and Not the Right Crude Bet for Most Investors

In the world of exchange-traded products (ETPs), there are dozens of avenues for investors looking for exposure to crude oil, including the U.S. Oil Fund (NYSEARCA:USO), but in the search for oil ETFs, investors ought to steer clear of USO.

USO Is a Broken Oil ETF and Not the Right Crude Bet for Most Investors

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Over the near-term, USO is undoubtedly tempting because oil prices are in rally mode. After plunging into single-digit territory in March as the novel coronavirus outbreak punished riskier assets, West Texas Intermediate (WTI) futures closed at $33.42 per barrel on Friday, May 22, capping a fourth consecutive winning week.

The stars are aligning for an oil rally. There are signs of a nascent recovery in the airline industry and it’s possible that on the back of a raft of supply cuts earlier this year and a rebounding economy that oil demand could outpace supply later in 2020.

These expectations and others are even providing some ballast to some of slower moving, previously disappointing energy equities and ETFs and that’s all the more reason why USO is an “avoid” as is explained below.


When USO debuted just over 14 years ago, it was designed to provide exposure to the front month WTI contract, meaning that market participants holding the fund in, say, March would want the April contract to appreciate.

That’s a straight forward strategy, but one that often doomed USO users that invested in rather than traded the oil ETF. Thing is by only holding one WTI contract, USO had to roll into the next contract every month as the original contract drew closer to expiration.

History shows a lengthy track record of rolling and all that rolling leads to a high expense ratio of 0.79% per year, or $79 on a $10,000 investment. By comparison, investors can access the cheapest equity-based energy ETF for just $8.40 annually on a $10,000 position.

All those rolling costs created another glum scenario: years in which USO would lag oil even when the commodity appreciated. In fact, data confirm USO is a long-term value destroyer. As of March 31, the oil ETF’s average annualized performance since inception was a loss of almost 18%, good for a net asset value decline of almost 94 percent since the product’s debut.

Fast-forward to the March market meltdown and USO’s status as a broken product was confirmed. As volatility spiked and crude prices slid, USO essentially became a leopard changing its spots, shifting into further out WTI contracts in an effort to mitigate turbulence.

By the letter of the law and its own prospectus, USO can do that, but that also means market participants looking to the oil fund for short-term exposure aren’t getting what they signed up, a situation that’s likely to continue.

At this time, it is likely that the factors limiting USO’s investments in the Benchmark Oil Futures Contract will continue, including as a result of the COVID-19 pandemic and the state of the oil markets, and that USO’s need to invest in other permitted investments will continue,” according to a Securities and Exchange Commission (SEC) filing by USO’s issuer.

Bottom Line

In fairness to USO, it still has some utility for active traders. It surged 24% last week and is higher by 32.50% over the past month.

However, investors shouldn’t take that bait in search of contrarian bets because a new problem for USO is emerging.

On May 22, it was revealed that RBC Capital Markets, the bank serving as the lone futures commission merchant for USO is barring the fund’s operator from buying or holding crude contracts until further notice. Translation: until USO’s issuer can locate an alternative to RBC, which it has yet to do, the product may end holding up lots of cash and t-bills and be far removed from being an oil ETF.

With so many other energy ETFs out there, investors simply don’t need the headaches that can come along with embracing USO.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

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