Contango has contributed to the long-term underperformance in a futures-backed oil ETF compared to West Texas Intermediate crude oil spot price. Over the past five years, WTI crude oil spot price has declined 55.6%, whereas USO decreased 71.0%.[related_stories]
Consequently, it would be in the best interest of a futures-based ETF investor to limit the negative effects of contango and profit off backwardation as the ETFs roll contracts set to expire for a later-dated contract. To limit the negative effects of contango, investors may consider investing in futures-backed commodity ETFs with longer-dated contracts.
For instance, 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 to maximize gains or minimize losses associated with the implied roll yield. USL, on the other hand, ladders 12 months of contracts to better control for backwardation and contango.
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The laddered approach has helped USL outperform USO over the long-term or at least perform less poorly. USL has shown an average annualized return of -16.3% over the past five years, whereas USO returned an average -22.0%.
However, since DBO and USL may both include contracts with longer maturities, the ETFs could be less sensitive to short-term swings in the spot price than USO. For instance, DBO and USL have underperformed USO during the recent recovery of WTI prices.