Victoria Bay Asset Management is betting that an exchange traded fund (ETF) that tracks the spot price of oil instead of futures might be the way to go. That’s why they’ve launched their third ETF, the United States 12 Month Oil Fund (USL). It began trading on Wednesday.

Matthew Hougan at IndexUniverse cautions that while it might sound like a good idea on the surface, the fund could also wind up being an underperformer in certain situations. Victoria Bay’s other fund, the U.S. Oil Fund (USO), approaches futures by buying the near-month contract and rolling it over into the next month as each contract expires. USL spreads out its investments across 12 months of contracts, buying an equal amount of each contract.

Victoria Bay says this approach insulates USL a bit more from contango and backwardation. In contango, futures-based ETFs could lose some money each month. However, while in backwardation, those ETFs can gain. Hougan says investors might find it worth their while to alternate between traditional futures-based oil ETFs and USL, depending on how the futures are doing. And if this sounds confusing, it might be worth understanding before adding to your portfolio.

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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