Monday, May 21, 2007

Ignore the US Oil Fund ETF (USO), an ETF Failure

When it comes to exchange traded funds (ETFs) no two ETFs are alike. Also, not all are successful. For every S&P 500 Spyder (SPY) or Nasdaq Qs (QQQQ) there are several lightly traded ETFs. However, the one ETF that has failed investors consistently is the US Oil Fund ETF (USO). Investors have expected this ETF to trade in concert with the price of crude oil. However, nothing could be further from the truth. Unlike the Streetracks Gold ETF (GLD) which closely tracks the price of gold, the USO is a complex ETF which has failed to deliver. Since the USO relies on the use of derivative contracts rather than physical assets and gets caught up in the vagaries of the crude oil markets – such as price contango – the USO has a built in recipe for disappointment. If you want to use exchange traded instruments to take advantage of crude oil price movements then think twice. You are better off looking for an oil services or integrated oil stock that highly correlates with crude oil prices rather than playing around with the USO.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were short shares of SPY--- although positions can change at any time.

1 comment:

Anonymous said...

If you're interested in other oil ETFs that might fit your portfolio more, I analyzed the 3 available market products last month here.

If you're interested in liquid dollar ETFs as well, here is a list of the ETFs/CEFs that have traded the most by dollar value (over 1B YTD).

-Michael J Bommarito II