USO Underperforms Benchmark

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With oil having come off its highs, the performance, or lack thereof, of the United States Oil Fund (USO) has raised some eyebrows, as the WSJ (subscription required) reports in “The Sum of Oil Fears:”

The United States Oil Fund, ticker USO, remains one of Wall Street’s most popular vehicles for betting on oil prices. The exchange-traded fund, which invests in oil futures, has had average assets of $2.2 billion since the start of 2009, according to Morningstar, meaning a payday for USO’s managers of roughly $23 million given the 0.45% management fee.

And yet, the USO and oil have inhabited different universes when it comes to performance. Front-month futures on West Texas Intermediate oil, USO’s benchmark, have risen 123% since the start of 2009, while the ETF has risen a mere 19%.

The big problem with USO is contango, in which near-term oil futures cost less than those with later maturities, a situation prevalent since the financial crisis. That has hurt USO because of the premium it pays to replace expiring contracts with new positions.

But it raises the question of why investors have stuck with the fund, which still manages $1.6 billion. And why they aren’t more focused on the shape of the futures curve. After all, ETFs can perform well if near-term oil prices are higher than those later out. That has often been the case in recent months with Brent crude oil, the European benchmark. While front-month Brent futures are up 19% this year, the United States Brent Oil Fund, or BNO, has risen 20%. The USO, in contrast, has continued to lag behind.

But BNO has increased to just $50 million since forming last year. It’s time for investors to get more focused on the fine print.

Be that as it may, current momentum numbers confirm that USO is not the ETF to hold.

It has come off its high by -12.85%, which would have triggered its trailing sell stop around the -10% level. With a dismal 4-week performance of -7.95%, it’s definitely time to stand aside and examine other opportunities.

Volatility is simply too high, and worries of a global slowdown, justified or not, can pull this market much lower.

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