When Victoria Bay Asset Management launched the exchange traded fund (ETF) United States Oil Fund (USO) in April 2006, it was supposed to reflect the percentage changes of the spot price of light sweet crude oil. To do this, USO would buy near-term oil futures contracts and roll them into next month’s contracts as they expired. Despite USO’s $1 billion assets, it quickly fell into contango tangles that ate into those returns, reports Diya Gullapalli for The Wall Street Journal. By April of this year, USO had sprung a leak and fallen more than 15% behind the crude oil price it was created to track.
To correct USO’s tracking problem, Victoria Bay Asset Management filed for a new oil ETF. The new United States 12 Month Oil Fund will be set up as a commodity pool as well, but unlike USO, it will employ futures contracts differently. This new ETF will track crude oil as measured by the changes in the average 12 months of futures contracts on the New York Mercantile Exchange. The mixing of the 12 months of futures prices will help to mirror the longer-term oil price movements originally intended.
We’ll have to wait and see if the new oil ETF will prove to be USO’s Band-Aid.
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