A Guide To Investing In Uso Etf: Strategies And Tips

The United States Oil Fund (USO) is an exchange-traded product (ETP) that provides investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. USO is designed for short-term investors who can continuously monitor their positions and is not suitable for long-term investors due to the risk of contango. The fund's investment objective is to reflect the daily percentage changes in the spot price of WTI crude oil delivered to Cushing, Oklahoma, and it invests primarily in oil futures contracts, with a focus on near-month contracts. USO has underperformed the spot price of WTI crude oil in recent years, and investors should be aware of the risks associated with investing in the oil market and USO's complex structure.

USO's structure and risks

The United States Oil Fund® LP (USO) is an exchange-traded security that is designed to track the daily price movements of light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca. The fund's benchmark is the WTI crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).

USO seeks to achieve its investment objective by investing primarily in futures contracts that are traded on the NYMEX, ICE Futures Europe, and ICE Futures U.S., or other exchanges. The fund's investment objective is for the daily changes, in percentage terms, of its shares' net asset value (NAV) to reflect the daily changes in the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in the Benchmark Oil Futures Contract, plus interest earned on USO's collateral holdings, less USO's expenses.

USO may also invest in other oil-related investments, including swap and forward contracts, to comply with regulatory requirements, risk mitigation measures, liquidity requirements, or in view of market conditions. These investments are collateralized by cash, cash equivalents, and US government obligations with remaining maturities of 2 years or less.

USO provides features such as intra-day pricing, market, limit, and stop orders, portfolio holdings, market price, NAV, and TNA on its website each day.

Risks

USO is not a proxy for trading directly in the oil markets, and investing in USO involves risks similar to those involved with an investment directly in the oil market. These risks are real and should be carefully considered.

USO often suffers from severe contango, making the product more appropriate for short-term traders. Contango occurs when the price of a futures contract on an underlying asset is above its expected future spot price, causing negative roll yields. As a result, investors will lose money when selling expiring futures contracts and purchasing further dated contracts at a higher price.

Crude oil and natural gas are among the commodities that have historically experienced long periods of contango, and the United States Oil Fund suffers from negative roll yields when purchasing further dated WTI futures contracts. Over the long term, these negative roll yields add up, causing investors to experience losses. Therefore, investors planning to gain long-term exposure to the oil market should avoid investments in the United States Oil Fund.

Additionally, the amount of the discount or premium in the trading price of USO relative to its NAV per share may be influenced by various factors, including the number of investors seeking to purchase or sell shares in the secondary market, the availability of Creation Baskets, the liquidity of oil futures, and the market for other oil-related investments.

Reverse splits

Reverse stock splits, also known as stock consolidations, stock merges, or share rollbacks, are a type of corporate action that consolidates the number of existing shares of stock into fewer, higher-priced shares. In the case of the United States Oil Fund (USO), a 1-for-8 reverse stock split was implemented on April 28, 2020, reducing the number of outstanding shares by a factor of 8. This means that for every 8 shares of USO held before the split, an investor would have 1 share after the split, with the share price increasing by a factor of 8 to maintain the same overall value.

A company may undergo a reverse stock split for several reasons:

• Prevent delisting: Major exchanges like the NYSE or Nasdaq require listed companies to maintain a minimum share price, typically $1.00. A reverse stock split can help a company avoid delisting if its share price falls below this threshold.
• Attract large investors: Many institutional investors and mutual funds have policies that prevent them from investing in stocks with a share price below a certain minimum value. Reverse stock splits can help companies maintain higher share prices and attract these large investors.
• Satisfy regulators: In some jurisdictions, a company's regulation may depend on the number of shareholders. By reducing the number of shares through a reverse stock split, companies can lower the number of shareholders and potentially come under the purview of their preferred regulator or set of laws.
• Boost spinoff prices: Companies planning to spin off a new company through the sale or distribution of new shares may use reverse splits to gain more attractive pricing for the spinoff.

While a reverse stock split does not directly impact a company's value, it is often perceived negatively by the market. It can signal that the company is in distress, and the stock price is declining. Additionally, the stock's liquidity may be impacted as the reduced number of shares in the open market can lead to higher transaction costs for investors.

Shares outstanding

USO is an exchange-traded security that is designed to track the daily price movements of light, sweet crude oil. It issues shares that can be bought and sold on the NYSE Arca. USO's investment objective is for the daily changes in its net asset value (NAV) to reflect the daily changes in the spot price of light, sweet crude oil delivered to Cushing, Oklahoma. This is measured against the daily changes in the Benchmark Oil Futures Contract, plus interest earned on collateral holdings, and less USO's expenses.

USO's benchmark is the near-month crude oil futures contract traded on the New York Mercantile Exchange (NYMEX). Due to the nature of futures contracts having an expiration date, USO must actively roll its front-month futures contract to the next month to avoid taking delivery of the physical commodity. This process of rolling over futures contracts is done every month.

On April 28, 2020, USO underwent a 1-for-8 reverse share split, reducing the number of shares outstanding and resulting in proportionally higher-priced shares. This action is often interpreted as a sign that the exchange-traded product is struggling to maintain its perceived value.

Is it an ETF?

The United States Oil Fund (USO) is an exchange-traded product (ETP) or exchange-traded commodity (ETC) that seeks to provide investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil.

USO is designed for short-term investors who can continuously monitor their positions and who are bullish on short-term futures contracts on WTI crude oil. The fund's benchmark is the WTI crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).

While USO is often referred to as an exchange-traded fund (ETF), it is technically not an ETF. An ETF is a publicly offered vehicle that trades on a traditional exchange and features underlying securities such as stocks, bonds, or other securities. On the other hand, USO is an ETC, which invests in futures contracts.

USO issues shares that can be purchased and sold on the NYSE Arca. The fund seeks to achieve its investment objective by investing primarily in futures contracts traded on the NYMEX, ICE Futures Europe, and ICE Futures U.S. or other exchanges. It may also invest in other oil-related investments, such as swaps and forwards, to comply with regulatory requirements, risk mitigation, liquidity, or market conditions.

History of disappointment

The United States Oil Fund (USO) has a history of disappointing investors. USO is an exchange-traded security that tracks the daily price movements of light, sweet crude oil delivered to Cushing, Oklahoma. While USO seeks to provide investment results corresponding to the daily price changes of crude oil, it has often fallen short of this objective.

Firstly, USO has underperformed the spot price of West Texas Intermediate (WTI) crude oil, which is its benchmark. Since 2020, USO has failed to correctly measure its daily performance relative to WTI crude oil. This underperformance has led long-term investors, who are typically bullish on oil, to avoid investing in USO.

Secondly, USO's structure and strategy have contributed to its disappointing performance. USO's focus on near-month or front-month futures contracts leads to roll costs and a high expense ratio of 0.70% to 0.79%. This is significantly higher than the annual fee on other exchange-traded funds (ETFs). Additionally, USO's investment in various WTI contracts, instead of just the front-month contract, exposes investors to the risk of higher prices when those contracts enter front-month territory.

Moreover, USO's history of reverse share splits indicates its struggle to maintain its perceived value. In April 2020, a 1-for-8 reverse share split was implemented, reducing the number of outstanding shares and increasing their price proportionally. Such actions are often interpreted as a sign of trouble for the exchange-traded product.

Finally, USO's performance relative to other energy-focused ETFs, such as the Energy Select Sector SPDR (XLE), has been disappointing. Over the past six years, USO has only outperformed XLE twice on an annual basis. In down years, USO's losses have often exceeded those of XLE, and USO has consistently been more volatile than its equity counterpart.

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