One would think with the ever-rising cost of a barrel of oil, the related exchange traded funds (ETFs) would be hitting new heights, too. But one would be wrong.
This isn’t to say the funds are doing poorly, exactly, but they’re hardly soaring in tune with the prices. For example, the largest oil ETF, United States Oil (USO), held almost $1.27 billion in assets in January 2007. Back then, oil was practically being given away at $49.90 a barrel. By this January, oil topped $100 a barrel, but USO’s net assets dipped to $545.9 million.
ETFs move upward both when people invest money in them and when their underlying assets appreciate, reports Gregory Meyer for the Wall Street Journal. When funds shrink in a market where the prices are rising, the implication is that investors are taking their money out.
What gives? A potential reason is contango (meaning that the futures price is higher than the spot price). Contango gripped the oil markets last year, and investors could still be feeling skittish about it happening again.
Another reason is that investors could simply just want more diversification and are reluctant to put all of their eggs in just one commodities basket. One way to get it is through the PowerShares DB Commodity Index Tracking Fund (DBC), which holds futures for, among other things, gold, oil, corn and wheat.
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.