Oil ETFs: Still Crazy After All These Years

Oil ETFs miserably fail at replicating the spot price of West Texas Intermediate (WTI) crude. If you’d like to learn why this is so, you may wish to review a well-written article that explains contango and backwardation.

However, my goal is far more basic. I only wish to help investors visualize just how far off the performance mark an Oil ETF can be.

The largest Oil ETF, United States Oil (USO), has $2,000,000,000 in assets. Yep… that’s billion with a “b.” And the stated goal for USO is ”to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil.”

How well did United States Oil (USO) do at achieving its stated goal over the last year or so? Well, from 2/2/2009 to 2/23/2010, the spot price of crude gained 100% from $40 per barrel to $80 per barrel.

In contrast, USO gained 35%.

Sure… there are a few other ETFs that endeavor to replicate oil’s movement in some shape, way or form. The iPath S&P GSCI Crude Oil Total Return Index Note (OIL) is a popular exchange-traded note. As a note, you actually have the credit risk of Barclays Bank (BCS), as well as the volatility of the underlying futures contracts for the commodity. The reward? 35%.

Meanwhile, other ETF efforts that use commodity futures contracts, United States 12 Month Oil (USL) and PowerShares DB Oil (DBO), did a little better at 45% and 50% respectively; in fact, they may even have accomplished their stated goals for the futures market.

Still, let’s face it. Investors who invested in these Oil ETFs did so because they were bullish on the commodity. Instead of getting 100%, they got 1/3 or 1/2 of the upside. That’s more than a little bit of a performance disappointment.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.