Market Overview

5 Things You Need To Know Before Buying The USO Oil ETF

5 Things You Need To Know Before Buying The USO Oil ETF

The United States Oil Fund (NYSE: USO) recently turned 14, and for much of those 14 years on the market, the oil exchange traded product has been known as one of the largest and most heavily traded commodity ETPs.

Down almost 40% over just the past week, USO is gaining notoriety, if not infamy, at a rapid pace. Those are the breaks for a fund like this when oil spends some time trading below zero and producers are practically bribing buyers to take the stuff off their hands.

With the complexion of the oil market changing for the worse by the day, USO is under siege and now, more than ever, traders embracing this product that aren't initially familiar with its internal plumbing need to know what they're getting themselves into.

And yes, plenty of traders are getting into something with USO. For the week ending April 21, the fund took in $2.64 billion, a total surpassed by just two other exchange traded funds.

With that in mind, consider these five “must knows” about USO.

1. USO's Structure Is Changing

Last week, United States Commodities Funds (USCF), USO's issuer, said it's altering the oil product to include various West Texas Intermediate (WTI) contracts instead of just the front month.

For the past 14 years, USO solely held the front month contracts and would roll into the following month two weeks before expiration. The focus on the nearest month contracts leads to roll costs, explaining USO's high expense ratio of 0.79%, or more than quadruple the annual fee on the cheapest gold ETF.

By expanding to further out futures contracts, USO runs the risk of exposing investors to contracts that today are sporting higher prices than spot oil will be at when those contracts enter front month territory.

2. USO Is Reverse Splitting

In the pantheon of equity markets, be it single stocks or ETFs, there are precious few examples of reverse splits working out well, but with USO laboring around $2.50 at this writing, the fund is primed for this type of superficial alteration.

In a statement released Wednesday, USCF said the oil ETP will undergo a reverse a 1-for-8 reverse split on April 28.

“As a result of the reverse share split, USO shareholders on April 28, 2020 will receive one post-split share of USO for every eight pre-split shares of USO they hold,” according to the statement. “Immediately after the reverse share split is effective, USO's post-split shares will have an NAV that is eight times higher than that of pre-split shares.”

3. USO In Strange Spot With Shares Outstanding

Reverse splits lower the amount of a security's shares outstanding, making the USO reverse split announcement curious because the product is now grappling with a net asset value scenario that could see that NAV blow out well above the current market price.

To rectify that situation, USCF is appealing to regulators to allow it to offer more shares, potentially preventing an NAV collapse situation where investors holding USO incur even more punishment.

4. USO Probably Isn't An ETF

This is wonky stuff here, but the aforementioned exchange traded product term is almost universally, though inaccurately, replaced by “ETF.”

An ETF is a publicly offered vehicle trading on a traditional exchange that features underlying securities, such as stocks, bonds or other securities.

The proper designation for USO should be “exchange traded commodity” or ETC, because those instruments invest in futures contracts — which is exactly what USO does.

5. USO's History Of Disappointment

Let's assume there are investors or traders out there that are willing to overlook oil's collapse and all of the aforementioned points to consider USO. Or let's assume oil rebounds. In either scenario, USO, even with its change to include further out futures contracts, could disappoint.

USO has outperformed the equity-based Energy Select Sector SPDR (NYSE: XLE) Just twice over the past six years has on an annual basis, and in the down years, USO's losses are often well in excess of XLE's, while the futures-based product is almost always far more volatile than its equity counterpart.


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