What took them so long? And while they’re at it, they should also investigate US Natural Gas Fund UNG.
By Wolf Richter for WOLF STREET.
Finally, after watching how innumerable retail investors — enamored with betting in a convenient way on the price of US crude oil benchmark WTI — got systematically and predictably cleaned out year after year, the SEC and the CFTC are investigating certain aspects of the US Oil Fund [USO].
These types of funds don’t track the price of the commodity they claim to track, except in the very short term, and sometimes not even then. And long-term, by the way they’re structured and designed, they wipe out their buy-and-hold investors. But these funds are marketed to retail investors. This is USO from the beginning, having lost 18% per year on average since its inception (data via YCharts):
The SEC and the CFTC should also investigate the US Natural Gas Fund [UNG] which has a similar problem in not tracking the price of US natural gas over anything but the shortest period of time, and sometimes not even then, and systematically wiping out anyone sticking this into their portfolio.
These are not funds that should be marketed to retail investors – but that’s who is buying them. Experienced traders and the pros can trade the actual futures. But retail investors find futures intimidating, and so they buy these funds, and get systematically wiped out, even if the underlying commodity trades their way. The US Natural Gas Fund is even worse than USO, having lost 31% per year on average since its inception (data via YCharts):
The shares of these funds have gone through innumerable and massive reverse stock splits to keep the share price above a few dollars so that they could continue to be traded on the NYSE Arca, rather than over the counter as shares with a value or fractional pennies. Given the collapse of USO, the site is finally warning about it.
So what took US regulators so long? I don’t know either. But here are the details on the investigation into USO.
By Tsvetana Paraskova of Oilprice.com:
The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are investigating the most popular exchange-traded fund tracking crude oil prices, the United States Oil Fund, to ascertain if the fund has managed to properly disclose to investors the risks, Bloomberg reported on Friday, citing three sources familiar with the issue.
The United States Oil Fund LP (NYSEARCA: USO), one of the most popular oil-tracking ETFs for retail investors, was said to be one of the reasons for the historic plunge in May WTI Crude futures on April 20, a day before the May contract expired on April 21.
Many retail investors were stung by the plunge at the rollover of the May futures contract, and since then, the USO fund has amended its structure, including buying longer-dated contracts instead of front-month ones.
Now, according to Bloomberg’s sources, the investigation into the USO revolves around whether the fund has properly explained to shareholders that the value of the oil fund wouldn’t necessarily track the movement in spot oil prices. The SEC and the CFTC are also looking into the fund’s change of strategy to buy crude oil futures contracts with longer expiry.
The investigation into USO are still in very early stages and may not result in any allegation of wrongdoing, Bloomberg’s sources said, while the regulators haven’t found misconduct in the actions of the United States Commodity Funds, the company managing the oil ETF.
After the crash in WTI Crude futures last month, the CFTC issued a warning last week “informing the public about the unique risks associated with certain trading vehicles that use futures contracts or other commodity interests as they make investment decisions during the COVID-19 (coronavirus) pandemic.”
The commission said in its advisory that ETFs tracking commodities “might not provide investors opportunities to “buy the dip” or profit from long-term price gains in the underlying commodity.”
“This difference is because unlike with stocks, a futures contract cannot be held indefinitely in hopes that a fallen price will recover. Futures contracts expire, and contract holders must either deliver or take delivery of the underlying asset, or close out their contracts by taking an offsetting position before the delivery date,” the CFTC said in its advisory. By Tsvetana Paraskova for Oilprice.com
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