Why Oil ETFs Are Lagging Oil Prices

November 10th at 6:00am by Tom Lydon

Oil ETFsEarlier this year, oil exchange traded funds (ETFs) were lagging oil prices by a wide margin thanks to contango. Although the situation has improved, it brings to light a situation that futures-based commodity funds can experience.

In the last month, United States Oil Fund (NYSEArca: USO) has been lagging oil prices slightly: it’s up 10.4% in the last month, compared to about 10.7% for oil prices. PowerShares DB Oil (NYSEArca: DBO) is up about 10.2% in the same time period. (The four types of commodity ETFs).

Contango, when the near-month contracts cost less than the contracts further out, can negatively impact futures-based ETFs because it makes buying new contracts more expensive. This is a situation the oil funds warn of in their prospectuses. The opposite of contango, backwardation, can benefit these funds. The markets spent about half of last year in backwardation.

Since about mid-2008, the oil markets have been in contago. Although they’re still there, the front-month contract is trading about 65 cents below the second month.

United States 12-Month Oil (NYSEArca: USL) can be an option when contango is in play. The fund invests in futures contracts over all 12 months instead of the near-month ones. USL is up 10% in the last month.

For more stories about commodity ETFs, visit our commodity ETF category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.