Understanding What YOU Own
It is important to understand what you own in your portfolio. Understanding what you invest in is crucial to long-term investing success. It is also why retail investors were crushed recently for buying the United States Oil Fund (USO). The USO is an exchange-traded fund (ETF) that tracks the daily price movements of West Texas Intermediate crude oil (WTI). It is also the largest oil ETF and has recently been in the headlines for all the wrong reasons.
Retail investors flooded the fund, speculating that oil would rebound in the future and subsequently prices would increase. However, the USO is an oil futures contract. It is not a spot contract for directly investing in the price of oil. In the past, the spreads between the two have been fairly narrow. However, due to recent events, this is not the case.
The USO operated by closing its contracts two weeks before the current month’s expiration date and buying the following “front-month” contracts. Unfortunately, there has been a perfect storm during the coronavirus crisis with oil and crude prices. In March, Russia and Saudi Arabia started a price war over oil after they were unable to come to an agreement on cutting back production of oil. Instead, the countries competed for market share and increased production. With the economy shut down, the global demand for oil and gas has decreased. Production ramped up, demand diminished and now there is a limited capacity for storage. Last week, May WTI prices plunged into negative territory for the first time in history. Sellers of oil had to pay buyers to offload their production.
Due to the recent events, USO has been forced to change the structure of the fund to stay afloat. According to ETF.com, “Starting April 17, 2020, USO changed exposure from holding specifically front-month contracts to holding approximately 20% of its portfolio in near term contracts.” The USO has since restructured again and announced on Monday that they will invest 30% in July contracts, 15% each in August, September, October and December contracts, and 10% in June 2021 contracts. This all comes as the fund is down 83% for the year. According to CNBC and data received from S3 Partners, short sellers capitalized on these anticipated movements. The firm stated that over the recent two-month period, short sellers have tripled their positions in the USO.
The lesson here is to understand what you are investing in. Futures contracts and commodities trading are short-term strategies. These strategies should be executed by experienced day traders and should not hold a place in a retail investor’s portfolio.
Wiser Wealth Management believes the best way to achieve investment success is by focusing on a long-term investment strategy. Our model portfolios are tactically managed through low cost ETFs based on the investor’s risk tolerance. If you are considering having someone manage your investments or interested in a second opinion, please reach out to our team at www.wiserinvestor.com or by calling (678) 905-4450.
Matthews Barnett, CFP®, ChFC®, CLU®
Financial Planning Specialist