Industry observers have raised questions over the pricing and performance of exchange traded fund (ETF) -like instruments designed to give investors exposure to crude oil. John Spence for reports United States Oil Fund (USO) is a commodity pool whose objective is to reflect the changes in the price of light sweet crude oil. USO is also the oldest and largest of these commodity/futures based ETFs.

USO has come under fire lately as the ETF declined 23% last year, while the spot price of crude oil for immediate delivery fell 11%.  But this is like comparing apples to oranges.  The spot price for oil is based on immediate delivery, while USO invests in futures and has to roll contracts, dealing with contango (longer-dated futures are more expensive than near-month contracts).  There is no actual delivery of oil to the ETF, unlike the streetTRACKS Gold Shares (GLD) that actually holds gold bullion.

Because of contango, investors may lose money, but the opposite can happen with backwardation (longer-dated futures are cheaper).  Investors need to understand the issues involved when investing in commodities and futures and providers need to be more aware of education on these products.


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.

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