For futures-based ETFs, like the U.S. Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, the widening contango could eat away at long-term returns. Specifically, USO tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance. [Positioning for an Oil ETF Rebound? Watch For Contango.]
Alternatively, the PowerShares DB Oil Fund (NYSEArca: DBO) and United States 12 Month Oil Fund (NYSEArca: USL) provide exposure to WTI oil but include a different weighting methodology to limit the negative effects of contango. DBO can include contracts as far out as 13 months and dump contracts at any point. USL, on the other hand, ladders 12 months of contracts to diminish the effects of backwardation and contango.
U.S. Oil Fund
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Max Chen contributed to this article.