Gone are the days when investors looking to make a play on the rising oil prices did so through equities of energy companies that enjoyed profitability at every crude oil price spike. With the rise of the ETF industry, investors have changed the way while approaching commodity investing specially in the oil and natural gas segment. Knowing how you can invest in oil should be a part of your game plan whether it’s time to buy natural gas and oil or not.
One of the popular exchange-traded commodity product available to U.S. investor offering exposure to crude oil is the United States Oil Fund (USO). The US Oil Fund (USO) seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund invests in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. The fund also invests in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.
The USO was created as a proxy to track the price of oil. When the fund was first created, its price was exactly 1-1 that of the current future’s month oil price. USO is essentially a rolling ETF, which means in essence that every 30 days or so, the ETF has to “roll” into the forward contracts of oil before the ones it is holding expires. Rolling the current month’s contracts into the next month’s contracts, especially lately, creates what is called contango when the future price is higher than the current price. Since the United States Oil fund relies on the use of derivative contracts rather than physical assets experts fear that it just might get entangled in the vagaries of the crude oil markets such as price contango. Some of the losses are however mitigated because the USO earns interest on the money it collects from investors, and because it only needs 10% of those funds to actually secure the futures contracts because of leverage.
On the positive side, whenever the future contract costs less than the previous month’s contract, and thus the fund actually earns a higher rate of return than the fund it is tracking.
Top Ten Holdings - USO
as of 06/30/2010
Company YTD Return % of Assets
Future Contract On Wti Crude Future Jul10 -- 24.41%
Future Contract On Wti Crude Future Jul10 -- 19.48%
Fidelity Instl MM Fds Government I -- 16.50%
FIGXX -- 9.60%
GSGXX -- 4.40%
Future Contract On F/C Ws Crude Future July10 -- 3.25%
USO Total expense ratio: 0.96%
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Most people i have discussed this fund with have advised me to stay away from it as its using derivative contracts. Although id like to see it make a positive move.
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