"Retail investors who believed they were investing in crude oil"

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"Retail investors who believed they were investing in crude oil"

Post by nisiprius »

Good CNBC article: Retail investors who believed they were investing in crude oil get a rude awakening. It would have been much better if something like this had been published a long time ago--and if products like USO were required to include warnings at least as strong as those seen on the home pages for leveraged ETFs.
Many retail investors mistakenly believe [the USO ETF] is a proxy for investing in the “spot” (cash) price for oil. But it isn’t, and never has been. The purpose of the fund was to track as closely as possible the front-month oil futures contract, not the spot price.

...every month USO and other similarly structured ETFs have to close out their futures positions by buying the next month’s contract, and since it is almost always a higher price an investor over time — many months — will lose money.

These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions. They are not meant as long-term buy and hold vehicles.

This information has been known — and disseminated — for years. But recent developments have brought in a whole new group of retail “tourists" who may not be as well informed....

USO experienced an enormous influx of new money last week, resulting in the creation of many new shares, which were accomplished by buying futures contracts. The result: USO came to own about 25% of the front month futures contracts.

It’s not unusual for commodity funds to attract new money when prices are down. But these were big drops in the price of oil that attracted a lot of people wanting to make bets, from hedge funds looking to hedge or short to retail investors hoping to profit from a bounce in oil down the road.

Except some retail investors did not understand they were not buying the spot price of oil....

Dave Nadig, CIO and director of research of ETF Trends, has been grappling with these issues for years. For him, it’s simple: “The way to solve this problem is to gate access. FINRA should make you fill out the same forms you have to fill out when you open a futures market. I feel sorry for those people who didn’t bother to understand about what they are investing in. We should be regulating access to these products the way we regulate access to the underlying. If my mom wants to buy USO, she should have to fill out the same papers she has to fill out to trade futures.”
There's a good deal more in the article.

I have to say that this is not surprising given the language USO is allowed to use in its fact sheet that says, my boldfacing:
The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma...
Generally, the fund's website and literature does far less than those of leveraged and inverse ETFs to educate and warn the retail investor. It's not good enough to have language deep in the prospectus like "USO’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil. A forum participant said
I wrote that off as corporate/legal speak. I'm sure if you read any prospectus, it will say and add all sort of caveats.... That the S&P 500 fund for example, will not track S&P 500 index because of <laundry list of reasons>, which is to cover [themselves] from being sued. But in reality a good S&P 500 fund does track the index.... I was expecting USO for example to track oil prices period. It failed. Using Oil Futures benchmark as a benchmark is shady.
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Re: "Retail investors who believed they were investing in crude oil"

Post by papito23 »

I have a little play money and a few TSLA shares. You all might remember the crazy Dec-Feb rally.

Via Twitter I found that one of the top Google searches on Feb. 4 had become "Should I buy Tesla stock"

I texted a couple friends and asked them to type in "Should I..." into a search engine. They all replied "Says 'buy Tesla stock'. LOL did you hack my phone?"

I took that as a pretty solid contrary indicator, that retail investors + some short-selling-covering-something-I-don't-understand was pushing things way beyond fundamentals. Indications of likely market manipulation somewhere in there. Sold a couple shares the next morning Feb. 5 for $798 (again, just fun money) that I had bought <$300.

A month ago I wanted back in. Maybe under $300. Maybe. It dipped below $400 and I missed it. Pushing $700 in the pre-market today.

Reason #428 why the vast majority of my investments are boring.
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Re: "Retail investors who believed they were investing in crude oil"

Post by bugleheadd »

papito23 wrote: Wed Apr 22, 2020 6:49 am I have a little play money and a few TSLA shares. You all might remember the crazy Dec-Feb rally.

Via Twitter I found that one of the top Google searches on Feb. 4 had become "Should I buy Tesla stock"

I texted a couple friends and asked them to type in "Should I..." into a search engine. They all replied "Says 'buy Tesla stock'. LOL did you hack my phone?"

I took that as a pretty solid contrary indicator, that retail investors + some short-selling-covering-something-I-don't-understand was pushing things way beyond fundamentals. Indications of likely market manipulation somewhere in there. Sold a couple shares the next morning Feb. 5 for $798 (again, just fun money) that I had bought <$300.

A month ago I wanted back in. Maybe under $300. Maybe. It dipped below $400 and I missed it. Pushing $700 in the pre-market today.

Reason #428 why the vast majority of my investments are boring.
I just typed "should I" in chrome and get "should I buy oil stocks"
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Re: "Retail investors who believed they were investing in crude oil"

Post by Noobvestor »

Image

:) :( :o :shock: :oops:
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Re: "Retail investors who believed they were investing in crude oil"

Post by nisiprius »

To be fair (but what fun is that?), an essentially identical chart appears right on USO's home page as well. It would be interesting to have solid information on what "retail tourists" have actually read prior to pushing the "buy" button. Have they seen this chart and dismissed it, on the basis of "regardless of history, anybody can see that it is a screaming buy right now?"

Or do they not even do that much research, and buy based on a few stray sentences of discussion they've read in an article or heard on CNBC or something?
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Re: "Retail investors who believed they were investing in crude oil"

Post by JoMoney »

If the 'shoeshine boy stock tips' omen has anything to relate to this. USO is in for a world of hurt. I've heard it specificly being mentioned in circumstances and with people that otherwise would have nothing to do with investing, let alone trading, but believe (at least in the current state) it's a surefire hot stock tip.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

Not sure if it was in the OP's article, but had read that USO owns 30% of the next month futures and had record inflows just before that price went negative, in checking I see report of $1.6 billion in the week before negative oil price hit.

I'm sure most assumed they were essentially buying oil and that even if they knew it was actually the next month futures that they probably assumed that that is close enough to the spot price for buying the ETF to be treated as essentially "buying oil". Although, I had certainly had read articles when OPEC+ and Russia were negotiating that talked about storage running out, I don't know if that would have given me pause had I been considering "buying oil" via an ETF.
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Re: "Retail investors who believed they were investing in crude oil"

Post by firebirdparts »

On the google "should I" list, for me,

#4 is "Should I Buy USO"
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

USO now reminds me a bit of bitcoin a couple years ago. People who have never traded in "X" suddenly "know" the future and pile in.
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Re: "Retail investors who believed they were investing in crude oil"

Post by Valuethinker »

birdog wrote: Wed Apr 22, 2020 9:46 am USO now reminds me a bit of bitcoin a couple years ago. People who have never traded in "X" suddenly "know" the future and pile in.
Except this time it is "catch the falling knife".

People thought they were investing in the spot price of oil - but it appears that they are not.

USO became such a large factor in oil markets that it owned 33% of all of one particular contract - and buying a future, when you don't have access to (enough) storage, is a risky place to be.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

Valuethinker wrote: Wed Apr 22, 2020 9:54 am
birdog wrote: Wed Apr 22, 2020 9:46 am USO now reminds me a bit of bitcoin a couple years ago. People who have never traded in "X" suddenly "know" the future and pile in.
Except this time it is "catch the falling knife".

People thought they were investing in the spot price of oil - but it appears that they are not.

USO became such a large factor in oil markets that it owned 33% of all of one particular contract - and buying a future, when you don't have access to (enough) storage, is a risky place to be.
I used to trade the actual futures contracts at TD Ameritrade and I seem to recall that taking possession of the commodity was never an issue because if the front month contract expired your position was automatically sold. This probably varies based on account type.
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Re: "Retail investors who believed they were investing in crude oil"

Post by iamlucky13 »

JoMoney wrote: Wed Apr 22, 2020 7:57 am If the 'shoeshine boy stock tips' omen has anything to relate to this. USO is in for a world of hurt. I've heard it specificly being mentioned in circumstances and with people that otherwise would have nothing to do with investing, let alone trading, but believe (at least in the current state) it's a surefire hot stock tip.
And today it is not the shoeshine boy, but one of our main methods for looking for information in general. I also got "...buy oil stocks now" as the suggestion when I started typing "should I..."

For what it's worth, the top page of hits seems to mostly say no, it's too risky right now.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

Image

https://awealthofcommonsense.com/2020/0 ... gy-sector/

This chart and article put the wild swings in the price of oil in a longer term perspective. ...and it still looks crazy. I think I'll stay away from the sleepness nights involved with commodity speculation.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

birdog wrote: Wed Apr 22, 2020 10:03 am
Valuethinker wrote: Wed Apr 22, 2020 9:54 am
birdog wrote: Wed Apr 22, 2020 9:46 am USO now reminds me a bit of bitcoin a couple years ago. People who have never traded in "X" suddenly "know" the future and pile in.
Except this time it is "catch the falling knife".

People thought they were investing in the spot price of oil - but it appears that they are not.

USO became such a large factor in oil markets that it owned 33% of all of one particular contract - and buying a future, when you don't have access to (enough) storage, is a risky place to be.
I used to trade the actual futures contracts at TD Ameritrade and I seem to recall that taking possession of the commodity was never an issue because if the front month contract expired your position was automatically sold. This probably varies based on account type.
Yes, but the thing is the price for the "sale" became -$37. IOW, you'd have had to pay someone $37 to take a contract for a barrel of oil off your hands. If I understand how this works, perhaps you'd have paid $20 per barrel for May oil in March, then you would have to pay $37 per barrel to unload that May contract and another $20 per barrel to buy June oil. So you now have $77 invested per barrel of June oil that you own.
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Re: "Retail investors who believed they were investing in crude oil"

Post by nisiprius »

The article says:
“To buy USO you have to understand the oil futures market,” Davi told CNBC. “They [retail investors] just buy the ETF because they think the price of crude will go up, but they don’t understand the drivers, which are fairly complicated.”
How can you blame retail investors for thinking USO seeks to track the price of oil when the article itself says
The fund, which trades under the ticker USO and which is popular with retail investors, seeks to track the price of oil?
(Source)

Now, about those "Untied States..." :D

Image
Last edited by nisiprius on Wed Apr 22, 2020 11:23 am, edited 2 times in total.
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Re: "Retail investors who believed they were investing in crude oil"

Post by rich126 »

This information has been around for a while. Unfortunately most people don't spend a few minutes researching what they are buying, instead only complaining afterwards. I've never owned USO but I knew others who had and I recall reading "issues" with it.

There was another post here that was written a few weeks ago where the poster was asking about futures. I posted that while some things seem obvious (price of oil eventually increasing), often the market will work in strange ways and you could tons of money while waiting for the obvious or logical thing to happen (as in The Big Short where the guys knew the tranches of mortgages were often of junk quality and went short but nearly went bankrupt before making tons of money).

When I posted that, I had no idea things would go this low/badly for oil.

While I'm far from anti-regulation, I'm not sure if this is a case where I think it needs any. Admittedly I haven't given it a lot of thought. And there are tons of regulations out there that require investors be sent various documents (mailed or electronically) and I'm guessing 99% of the people never even scan them much less read them.
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Re: "Retail investors who believed they were investing in crude oil"

Post by afan »

nisiprius wrote: Wed Apr 22, 2020 6:35 am
A forum participant said
I wrote that off as corporate/legal speak. I'm sure if you read any prospectus, it will say and add all sort of caveats.... That the S&P 500 fund for example, will not track S&P 500 index because of <laundry list of reasons>, which is to cover [themselves] from being sued. But in reality a good S&P 500 fund does track the index.... I was expecting USO for example to track oil prices period. It failed. Using Oil Futures benchmark as a benchmark is shady.
I saw that quote in the original thread. To paraphrase the comment "I ignored what the fund said it was doing and decided, based on the name of the fund but without reading the prospectus, that it was really doing something entirely different than claimed. With this decision, I now complain that the fund has been doing what it said, rather than what I decided it should have been doing"

I don't know what rules one could impose to prevent people from thinking or investing like this. If they will ignore the information they are given then they will suffer the consequences.

It never crossed my mind to buy oil futures or USO. I am not interested in speculating in oil prices.
I don't know whether people who bought USO recently were speculating on changes in the prices of the fund, based on what it really does, or using it as a proxy for oil spot prices. I hope the former, but I cannot imagine what you can do to "protect" those who were doing the latter.

At some point adults have to be responsible for their actions.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

jeffyscott wrote: Wed Apr 22, 2020 11:14 am
birdog wrote: Wed Apr 22, 2020 10:03 am
Valuethinker wrote: Wed Apr 22, 2020 9:54 am
birdog wrote: Wed Apr 22, 2020 9:46 am USO now reminds me a bit of bitcoin a couple years ago. People who have never traded in "X" suddenly "know" the future and pile in.
Except this time it is "catch the falling knife".

People thought they were investing in the spot price of oil - but it appears that they are not.

USO became such a large factor in oil markets that it owned 33% of all of one particular contract - and buying a future, when you don't have access to (enough) storage, is a risky place to be.
I used to trade the actual futures contracts at TD Ameritrade and I seem to recall that taking possession of the commodity was never an issue because if the front month contract expired your position was automatically sold. This probably varies based on account type.
Yes, but the thing is the price for the "sale" became -$37. IOW, you'd have had to pay someone $37 to take a contract for a barrel of oil off your hands. If I understand how this works, perhaps you'd have paid $20 per barrel for May oil in March, then you would have to pay $37 per barrel to unload that May contract and another $20 per barrel to buy June oil. So you now have $77 invested per barrel of June oil that you own.
Right. It's the forced liquidation, so to speak, that can be devastating. My average futures contract holding period was measured in hours, not days.
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Re: "Retail investors who believed they were investing in crude oil"

Post by papito23 »

bugleheadd wrote: Wed Apr 22, 2020 6:54 am
papito23 wrote: Wed Apr 22, 2020 6:49 am I have a little play money and a few TSLA shares. You all might remember the crazy Dec-Feb rally.

Via Twitter I found that one of the top Google searches on Feb. 4 had become "Should I buy Tesla stock"

I texted a couple friends and asked them to type in "Should I..." into a search engine. They all replied "Says 'buy Tesla stock'. LOL did you hack my phone?"

I took that as a pretty solid contrary indicator, that retail investors + some short-selling-covering-something-I-don't-understand was pushing things way beyond fundamentals. Indications of likely market manipulation somewhere in there. Sold a couple shares the next morning Feb. 5 for $798 (again, just fun money) that I had bought <$300.

A month ago I wanted back in. Maybe under $300. Maybe. It dipped below $400 and I missed it. Pushing $700 in the pre-market today.

Reason #428 why the vast majority of my investments are boring.
I just typed "should I" in chrome and get "should I buy oil stocks"
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Re: "Retail investors who believed they were investing in crude oil"

Post by AlphaLess »

nisiprius wrote: Wed Apr 22, 2020 6:35 am Good CNBC article: Retail investors who believed they were investing in crude oil get a rude awakening. It would have been much better if something like this had been published a long time ago--and if products like USO were required to include warnings at least as strong as those seen on the home pages for leveraged ETFs.
Many retail investors mistakenly believe [the USO ETF] is a proxy for investing in the “spot” (cash) price for oil. But it isn’t, and never has been. The purpose of the fund was to track as closely as possible the front-month oil futures contract, not the spot price.

...every month USO and other similarly structured ETFs have to close out their futures positions by buying the next month’s contract, and since it is almost always a higher price an investor over time — many months — will lose money.

These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions. They are not meant as long-term buy and hold vehicles.

This information has been known — and disseminated — for years. But recent developments have brought in a whole new group of retail “tourists" who may not be as well informed....

USO experienced an enormous influx of new money last week, resulting in the creation of many new shares, which were accomplished by buying futures contracts. The result: USO came to own about 25% of the front month futures contracts.

It’s not unusual for commodity funds to attract new money when prices are down. But these were big drops in the price of oil that attracted a lot of people wanting to make bets, from hedge funds looking to hedge or short to retail investors hoping to profit from a bounce in oil down the road.

Except some retail investors did not understand they were not buying the spot price of oil....

Dave Nadig, CIO and director of research of ETF Trends, has been grappling with these issues for years. For him, it’s simple: “The way to solve this problem is to gate access. FINRA should make you fill out the same forms you have to fill out when you open a futures market. I feel sorry for those people who didn’t bother to understand about what they are investing in. We should be regulating access to these products the way we regulate access to the underlying. If my mom wants to buy USO, she should have to fill out the same papers she has to fill out to trade futures.”
There's a good deal more in the article.

I have to say that this is not surprising given the language USO is allowed to use in its fact sheet that says, my boldfacing:
The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma...
Generally, the fund's website and literature does far less than those of leveraged and inverse ETFs to educate and warn the retail investor. It's not good enough to have language deep in the prospectus like "USO’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil. A forum participant said
I wrote that off as corporate/legal speak. I'm sure if you read any prospectus, it will say and add all sort of caveats.... That the S&P 500 fund for example, will not track S&P 500 index because of <laundry list of reasons>, which is to cover [themselves] from being sued. But in reality a good S&P 500 fund does track the index.... I was expecting USO for example to track oil prices period. It failed. Using Oil Futures benchmark as a benchmark is shady.
Check out ticker symbol OIL.

Retail investors are going to get taken to the cleaners this Friday.
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Re: "Retail investors who believed they were investing in crude oil"

Post by patrick »

afan wrote: Wed Apr 22, 2020 11:27 am
nisiprius wrote: Wed Apr 22, 2020 6:35 am
A forum participant said
I wrote that off as corporate/legal speak. I'm sure if you read any prospectus, it will say and add all sort of caveats.... That the S&P 500 fund for example, will not track S&P 500 index because of <laundry list of reasons>, which is to cover [themselves] from being sued. But in reality a good S&P 500 fund does track the index.... I was expecting USO for example to track oil prices period. It failed. Using Oil Futures benchmark as a benchmark is shady.
I saw that quote in the original thread. To paraphrase the comment "I ignored what the fund said it was doing and decided, based on the name of the fund but without reading the prospectus, that it was really doing something entirely different than claimed. With this decision, I now complain that the fund has been doing what it said, rather than what I decided it should have been doing"

I don't know what rules one could impose to prevent people from thinking or investing like this. If they will ignore the information they are given then they will suffer the consequences.

It never crossed my mind to buy oil futures or USO. I am not interested in speculating in oil prices.
I don't know whether people who bought USO recently were speculating on changes in the prices of the fund, based on what it really does, or using it as a proxy for oil spot prices. I hope the former, but I cannot imagine what you can do to "protect" those who were doing the latter.

At some point adults have to be responsible for their actions.
Here is a simple rule to prevent this: give a brief warning (perhaps including the worst example in the recent past) that people might actually read instead of a long prospectus filled with unimportant details that almost no one will read and even fewer people will understand.

S&P 500: This fund has generic stock market risk. It could lose money due to actual or anticipated declines in corporate earnings, or a general decline in investor sentiment about stocks. Stocks have suffered large declines several times in the past century, the worst example (1929-1932) being a 79% loss after accounting for inflation.

Total bond market: This fund has generic nominal bond risk. It could lose money if interest rates rise, and have decreased future income if interest rates all. Real value of bonds may also be eroded over time due to inflation, with the worst example in the past century (1940-1981) having a 55% loss.

USO: This fund is subject to the risk that oil futures prices will fall due to increased supply or reduced demand. Due to the use of futures contracts which often have higher prices for later months, the fund's long term returns may be much worse than the long-term changes in oil prices. For example, in the 11 years starting June 2008, the fund lost 89% while the oil price only fell by 64%.
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Re: "Retail investors who believed they were investing in crude oil"

Post by AlphaLess »

nisiprius wrote: Wed Apr 22, 2020 11:17 am The article says:
“To buy USO you have to understand the oil futures market,” Davi told CNBC. “They [retail investors] just buy the ETF because they think the price of crude will go up, but they don’t understand the drivers, which are fairly complicated.”
How can you blame retail investors for thinking USO seeks to track the price of oil when the article itself says

The price of oil is not a simple concept.
There are 3 commonly known 'investment' products with a term structure:
- bonds (treasuries),
- oil,
- gold.

And oil is the most complicated.

The term structure of interest rates affect oil and gold (via a simple no-arbitrate relationship).
Gold term structure is driven by storage costs (2% a year), and some demand-supply.
Oil term structure is driven by supply demand a lot.

So, the May contract was trading at NEGATIVE $37. per barrel on Monday.
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Re: "Retail investors who believed they were investing in crude oil"

Post by David Jay »

But recent developments have brought in a whole new group of retail “tourists" who may not be as well informed....
This seems to parallel my concerns here: viewtopic.php?f=10&t=310486
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Re: "Retail investors who believed they were investing in crude oil"

Post by AlphaLess »

jeffyscott wrote: Wed Apr 22, 2020 9:23 am Not sure if it was in the OP's article, but had read that USO owns 30% of the next month futures and had record inflows just before that price went negative, in checking I see report of $1.6 billion in the week before negative oil price hit.

I'm sure most assumed they were essentially buying oil and that even if they knew it was actually the next month futures that they probably assumed that that is close enough to the spot price for buying the ETF to be treated as essentially "buying oil". Although, I had certainly had read articles when OPEC+ and Russia were negotiating that talked about storage running out, I don't know if that would have given me pause had I been considering "buying oil" via an ETF.
I think it is 30% of ONE day's worth of volume.

Since they need to roll, what matters is the percentage of one day's volume.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

AlphaLess wrote: Wed Apr 22, 2020 1:21 pm
jeffyscott wrote: Wed Apr 22, 2020 9:23 am Not sure if it was in the OP's article, but had read that USO owns 30% of the next month futures and had record inflows just before that price went negative, in checking I see report of $1.6 billion in the week before negative oil price hit.

I'm sure most assumed they were essentially buying oil and that even if they knew it was actually the next month futures that they probably assumed that that is close enough to the spot price for buying the ETF to be treated as essentially "buying oil". Although, I had certainly had read articles when OPEC+ and Russia were negotiating that talked about storage running out, I don't know if that would have given me pause had I been considering "buying oil" via an ETF.
I think it is 30% of ONE day's worth of volume.

Since they need to roll, what matters is the percentage of one day's volume.
Here's what the WSJ says:
USO, by contrast, is a perennial money-loser that still somehow controls a whopping 30% of the June benchmark U.S. crude futures contract...
https://www.wsj.com/articles/the-fund-t ... 1587489608

Would you interpret that as you have? I know nothing about this market, so just trying to understand.
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Re: "Retail investors who believed they were investing in crude oil"

Post by skepticalobserver »

Bloomberg has a similar article (Mom and Pop Piled Into Biggest U.S. Oil ETF During Historic Rout) https://www.bloomberg.com/news/articles ... nd=premium

Of USO it notes, “Reverse splits are designed to make potential investors believe the security has greater value than before as it is harder to consider buying a low single digit priced fund.” How many moms and pops unknowingly piled into CHK after its 1-for-200 reverse split?
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Re: "Retail investors who believed they were investing in crude oil"

Post by AlphaLess »

jeffyscott wrote: Wed Apr 22, 2020 1:40 pm
AlphaLess wrote: Wed Apr 22, 2020 1:21 pm
jeffyscott wrote: Wed Apr 22, 2020 9:23 am Not sure if it was in the OP's article, but had read that USO owns 30% of the next month futures and had record inflows just before that price went negative, in checking I see report of $1.6 billion in the week before negative oil price hit.

I'm sure most assumed they were essentially buying oil and that even if they knew it was actually the next month futures that they probably assumed that that is close enough to the spot price for buying the ETF to be treated as essentially "buying oil". Although, I had certainly had read articles when OPEC+ and Russia were negotiating that talked about storage running out, I don't know if that would have given me pause had I been considering "buying oil" via an ETF.
I think it is 30% of ONE day's worth of volume.

Since they need to roll, what matters is the percentage of one day's volume.
Here's what the WSJ says:
USO, by contrast, is a perennial money-loser that still somehow controls a whopping 30% of the June benchmark U.S. crude futures contract...
https://www.wsj.com/articles/the-fund-t ... 1587489608

Would you interpret that as you have? I know nothing about this market, so just trying to understand.
Of course, those numbers are related. But I don't know what WSJ means "controls a whopping 30% of the market".


Let's see what we can find on the interwebs.

2. From website.
http://www.uscfinvestments.com/uso

Shares outstanding: 1.449 Billion.
Share price: $2.81
NAV: $4Billion.

2.
They got a linear combination of Jun, Jul, and Aug contract. Let's just average it out, and average contract per barrel is roughly $20.

4.B / $20 = 200 million barrels.

One contract on CME is 1K barrels:
https://www.cmegroup.com/trading/energy ... tures.html
Contract Unit 1,000 barrels

So that is 200K contracts.

3. From CME, again, volume and open interest.
https://www.cmegroup.com/trading/energy ... e=20200421

Jun: 460K
Jul: 395K
Aug: 142K
Tota between the 3: 997K.

So USO holds 200K contracts, which is 20% of open interest.

Also, I was wrong about the volume percentage. Looks like the Jun contract alone trades 2.2M contracts per day.

When they are ROLLING, they are not buying oil. They are simply buying one contract, and selling another.

But because they are selling the FRONT, and buying 2nd or 3rd, that impact will definitely cause the front one to go down.

Seems like a pretty badly constructed ETF.
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Re: "Retail investors who believed they were investing in crude oil"

Post by JonnyB »

AlphaLess wrote: Wed Apr 22, 2020 5:01 pm
When they are ROLLING, they are not buying oil. They are simply buying one contract, and selling another.

But because they are selling the FRONT, and buying 2nd or 3rd, that impact will definitely cause the front one to go down.

Seems like a pretty badly constructed ETF.
Worse, everyone knows they have to roll contracts each month so traders can front run the roll.
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Re: "Retail investors who believed they were investing in crude oil"

Post by AlphaLess »

JonnyB wrote: Wed Apr 22, 2020 7:58 pm
AlphaLess wrote: Wed Apr 22, 2020 5:01 pm
When they are ROLLING, they are not buying oil. They are simply buying one contract, and selling another.

But because they are selling the FRONT, and buying 2nd or 3rd, that impact will definitely cause the front one to go down.

Seems like a pretty badly constructed ETF.
Worse, everyone knows they have to roll contracts each month so traders can front run the roll.
My point is: they are NOT buying NET oil. They are simply buying one contract, selling another. Which does have market impact. But not on the market of oil.

A lot of people are blaming oil ETFs for sinking the oil price. ETFs can't do that.
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Re: "Retail investors who believed they were investing in crude oil"

Post by Nate79 »

Oh well. People shouldn't invest in things they don't understand. People are also out their gambling their money away on bitcoin, penny stocks, etc. Pure greed that eventually takes care of itself negatively for the investor.
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Re: "Retail investors who believed they were investing in crude oil"

Post by fatFIRE »

If you look at UCO:

This leveraged ProShares ETF seeks a return that is 2x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.

https://www.proshares.com/funds/uco.html

Now USO:

The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares' NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.


http://www.uscfinvestments.com/uso

I'm not going into the prospectus, most people won't. But UCO has a clear warning for me, where it states and I bold it, Investors should monitor their holdings as frequently as daily.

Also I find USO benchmark misleading. They should have plotted spot oil price as another benchmark. But, if you do that, nobody will buy USO to "invest in oil".

USO is crap and was marketed as something else. At least UCO tells you up front, you have to look at it daily, so I know it's not for buy-and-hold.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.

If I understand the actual expectations of the fund, the second sentence should be something about how it will not track oil prices over longer terms and will most likely lose money, if used as a long term holding (several months?). The third sentence should be something about how, in particular, the fund will normally lose money when monthly contracts roll over, again assuming that I have understood the actual expectations of it.

Instead it says it's gonna track oil prices.
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Re: "Retail investors who believed they were investing in crude oil"

Post by oldcomputerguy »

Several posts were removed. As a reminder, general complaints and rants are off-topic.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

birdog wrote: Thu Apr 23, 2020 7:12 am
jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
Yes, so normal humans would assume that it will track it daily for 7 days, thus tracking it over a week and daily for 30 days, thus a month.

If an S&P 500 mutual fund said it tracks the index daily, I certainly would not assume that this means that the fund is not going to track it over a week or month.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

jeffyscott wrote: Thu Apr 23, 2020 7:32 am
birdog wrote: Thu Apr 23, 2020 7:12 am
jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
Yes, so normal humans would assume that it will track it daily for 7 days, thus tracking it over a week and daily for 30 days, thus a month.

If an S&P 500 mutual fund said it tracks the index daily, I certainly would not assume that this means that the fund is not going to track it over a week or month.
I don't think a normal human assumes when it says daily it really also means weekly and monthly. It resets at the end of each day, that's why it says it tracks the daily price. An S&P 500 fund doesn't say it tracks the daily price because it doesn't track the daily price. It tracks the price. Period.

Clearly it's confusing to you and probably others as well. I agree it could be more strongly stated right up front. But it is stated, nonetheless.
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Re: "Retail investors who believed they were investing in crude oil"

Post by rascott »

birdog wrote: Thu Apr 23, 2020 7:12 am
jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
Actually that's terribly inaccurate wording..... that implies that it tracks the daily spot price of WTI crude.... but it does no such thing. It tracks the daily price a future contract for crude.
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Re: "Retail investors who believed they were investing in crude oil"

Post by birdog »

rascott wrote: Thu Apr 23, 2020 7:45 am
birdog wrote: Thu Apr 23, 2020 7:12 am
jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
Actually that's terribly inaccurate wording..... that implies that it tracks the daily spot price of WTI crude.... but it does no such thing. It tracks the daily price a future contract for crude.
The wording is not the best. I agree. Especially when viewed through the lens of the recent loss of capital suffered by many in this fund. But as far as time frame, my point is simply that it tracks the daily price and that's also what it says, in the first sentence, that it does.
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Re: "Retail investors who believed they were investing in crude oil"

Post by afan »

The prospectus is a carefully worded legal document. It is reviewed to an absurd degree by multiple people inside and outside the offering company. It is read, word for word, by lawyers. All of these reviews seek to ensure that the prospectus describes what the fund does.
None of this helps those who do not read the prospectus and substitute instead what they assume the fund does.
If you want to KNOW what it does, rather than guess, then read the prospectus. It is not the fault of the fund if one guesses wrong about what one would have learned if they were to have read the document.

As I said, I am not sure who should buy a fund like this, but it is fine with me if the great invisible hand of capitalism finds some takers.

Maybe there are rational reasons for some of the purchases. Maybe some of the buyers are hopelessly uninformed about what they are buying because they never read the documents. The appropriateness of an investment to an individual's goals are up to the individual to decide. If the fund does badly enough or enough people figure out that they don't want it, then it will go away. Which is how capitalism works. No buyers means no business.

I am not going to complain because the Wellington fund does not invest in Wellingtons. After all, that is the name of the fund, so that tells me all I need to know about what it does.
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Re: "Retail investors who believed they were investing in crude oil"

Post by jeffyscott »

afan wrote: Thu Apr 23, 2020 9:53 amthe great invisible hand of capitalism
Hilarious, we are about a million miles from anything resembling that concept in the world today.
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Re: "Retail investors who believed they were investing in crude oil"

Post by nisiprius »

AlphaLess wrote: Wed Apr 22, 2020 5:01 pm...Seems like a pretty badly constructed ETF...
It is not "an ETF." It is "a commodity pool." Or, at least, there is widespread and possibly intentional confusion about what the heck it actually is.

This is important because the Investment Company Act of 1940 provides a large number of protections for retail investors. Naturally some investors like risk and prefer not to be protected, but you should know whether you are getting a normal ETF with those protections, or something else without them.

The factsheet leads off by calling it "The United States Oil Fund® LP (USO) is an exchange-traded security." But the prospectus says
The United States Oil Fund, LP (“USO”) is an exchange traded fund organized as a limited partnership that issues shares that trade on the NYSE Arca stock exchange (“NYSE Arca”).
And yet the same prospectus says later
USO is not a mutual fund registered under the Investment Company Act of 1940 (“1940 Act”) and is not subject to regulation under the 1940 Act.
To me, that means that means that it is not an "exchange traded fund" after all. It then says
USO is a commodity pool and USCF is a commodity pool operator subject to regulation by the Commodity Futures Trading Commission and the National Futures Association under the Commodity Exchange Act (“CEA”).
I believe it really is a commodity pool because this language is then followed by A FULL PAGE OF SHOUTING
Image
that begins:
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
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Re: "Retail investors who believed they were investing in crude oil"

Post by nisiprius »

afan wrote: Thu Apr 23, 2020 9:53 am...
The prospectus is a carefully worded legal document. It is reviewed to an absurd degree by multiple people inside and outside the offering company. It is read, word for word, by lawyers. All of these reviews seek to ensure that the prospectus describes what the fund does...
Let's assume that this is true of the USO prospectus and that it is perfectly legal to say, within the same prospectus, that it
  1. "is an exchange traded fund"
  2. "is not a mutual fund registered under the Investment Company Act of 1940 (“1940 Act”) and is not subject to regulation under the 1940 Act," and
  3. "is a commodity pool."
Assuming that this is perfectly legal, can you think of an innocent motive for using these discordant descriptions?
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Re: "Retail investors who believed they were investing in crude oil"

Post by patrick »

nisiprius wrote: Thu Apr 23, 2020 10:36 am
AlphaLess wrote: Wed Apr 22, 2020 5:01 pm...Seems like a pretty badly constructed ETF...
It is not "an ETF." It is "a commodity pool." Or, at least, there is widespread and possibly intentional confusion about what the heck it actually is.

This is important because the Investment Company Act of 1940 provides a large number of protections for retail investors. Naturally some investors like risk and prefer not to be protected, but you should know whether you are getting a normal ETF with those protections, or something else without them.
QQQ (which tracks the Nasdaq-100) is subject to the Investment Company Act of 1940, but still managed to lose 80% about two decades ago. It seems like there was plenty of risk remaining for retail investors in spite of those protections.
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Re: "Retail investors who believed they were investing in crude oil"

Post by fatFIRE »

birdog wrote: Thu Apr 23, 2020 7:12 am
jeffyscott wrote: Thu Apr 23, 2020 6:52 am I don't see where USO says that is meant to be a short term trading instrument not a long term holding. If, as it's apologist here states that is it's purpose and the reason it should be allowed to exist, that ought to be the first sentence of the description.
Well, the first sentence does say: The United States Oil Fund® LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil.

Daily. Not weekly or monthly or any other time frame. I agree it could be more sternly worded, such as the UCO prospectus is, but I also think it does say what it’s designed to do.
So the S&P 500 index fund is supposed to track the annual price of the S&P 500 index, and is therefore a long-term investment? Give me a break... please...
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Re: "Retail investors who believed they were investing in crude oil"

Post by rascott »

What's extra terrible about this fund currently..... they've hit their limit of ETF share creation.... so now the fund is trading at a serious premium to the underlying NAV. They have applied to the SEC to be permitted to begin new ETF share creation.... at which time the fund will further drop back to its NAV.

So a double whammy of losses likely possible for people buying this fund now. I purchased a handful of June put options for fun on this thing....as I believe there is a real possibility it goes to 0 in the next month or so.
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Re: "Retail investors who believed they were investing in crude oil"

Post by acegolfer »

To be fair, oil futures market is more liquid than oil spot market. Using futures is the right strategy, if you are managing ETF. I'll be surprised if it actually invested in the spot market. This is true for almost all commodity ETFs.
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Re: "Retail investors who believed they were investing in crude oil"

Post by afan »

jeffyscott wrote: Thu Apr 23, 2020 10:25 am
afan wrote: Thu Apr 23, 2020 9:53 amthe great invisible hand of capitalism
Hilarious, we are about a million miles from anything resembling that concept in the world today.
Seems to work pretty well in the commodities markets.
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Re: "Retail investors who believed they were investing in crude oil"

Post by dziuniek »

Buying USO is weak-sauce! Puts or Calls, let's go. Haha.
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Re: "Retail investors who believed they were investing in crude oil"

Post by Barry Barnitz »

Hi:

Two articles at ETF.com. appertaining to Oil exchange-traded securities:

More Big Changes For Biggest Oil ETF, Lar Crigger, April 22, 2020.
For the world's largest oil fund, the situation changes by the day—sometimes, by the hour.

Yesterday, several new developments occurred for the $5 billion United States Oil Fund LP (USO), including another portfolio overhaul, the emergence of sky-high trading premiums and an announced reverse share split.

Oil ETN To Close, Heather Bell, April 22, 2020.
The iPath Series B S&P GSCI Crude Oil ETN (OIL) is currently in the last stages of its existence. With oil prices plunging into negative territory on Monday, April 20, it halted creations and is scheduled to be called on April 30.
------

Addendum:

Third article:Oil ETF Chaos Like NatGas ETF 2009 Plunge, Summit Roy, April 23, 2020.
As I watch all the craziness that is going on with the United States Oil Fund LP (USO) , I can’t help but feel a sense of deja vu. Everything that is going on with the fund, from the billions of dollars of inflows to the suspension of creations to the huge premiums that have now developed, happened to a similar product in 2009.

That product is the United States Natural Gas Fund LP (UNG) , an ETF with the same issuer as USO—US Commodity Funds. Today a relatively niche product with modest assets of $413 million, back in 2009, it was the hottest ETF in the commodity markets.
Edited to add article

regards,
Last edited by Barry Barnitz on Thu Apr 23, 2020 3:16 pm, edited 2 times in total.
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Re: "Retail investors who believed they were investing in crude oil"

Post by afan »

nisiprius wrote: Thu Apr 23, 2020 10:50 am
afan wrote: Thu Apr 23, 2020 9:53 am...
The prospectus is a carefully worded legal document. It is reviewed to an absurd degree by multiple people inside and outside the offering company. It is read, word for word, by lawyers. All of these reviews seek to ensure that the prospectus describes what the fund does...
Let's assume that this is true of the USO prospectus and that it is perfectly legal to say, within the same prospectus, that it
  1. "is an exchange traded fund"
  2. "is not a mutual fund registered under the Investment Company Act of 1940 (“1940 Act”) and is not subject to regulation under the 1940 Act," and
  3. "is a commodity pool."
Assuming that this is perfectly legal, can you think of an innocent motive for using these discordant descriptions?
You raise an interesting question. Are all exchange traded funds regulated under the Act? I had never considered this and I am not sure what difference it makes. But for the curious the answer appears to be "NO"
Are All ETFs Alike?
No. ETFs can vary in a number of ways:

Regulatory structure. Most ETFs are registered with the SEC as investment companies under the Investment Company Act of 1940, and the shares they offer to the public are registered under the Securities Act of 1933. Some ETFs that invest in commodities, currencies or commodity- or currency-based instruments are not registered investment companies, although their publicly-offered shares are registered under the Securities Act.
https://www.finra.org/investors/learn-t ... raded-fund

I think the descriptions in a prospectus conform to reams of statutory and common law as well as 10x as much regulation about what they must say, cannot say and everything in between. Since it appears few investors read them, putting marketing statements in the prospectus would accomplish little beneficial to the offering company. It would expose them legally if they stepped outside the lines of how such a document is supposed to read.

Once upon a time someone tried to sell me a variable life policy. It was like pulling teeth to get straight answers to my questions so I asked for the prospectus. The agent did not want to send it to me, saying it was too long and complicates. I pointed out that, having tried to sell it they did not have a choice about sending it. So they did. It was well over 100 pages. I read it and took notes. It was an astonishingly terrible deal. I did not buy it.

If an investment has a prospectus too long or complicated to read, that is a great indicator that you should not buy it.

I assume the marketing material was intended to persuade people to buy the fund, because that is how marketing works.

I assume the prospectus is intended to comply with legal requirements.

I assume that people who buy funds without reading the prospectus often get something they did not expect.

I assume that people who make up an investment objective, at variance with the stated objectives of the fund, will never get what they are expecting.

I don't see a role of regulation or filling out more forms. If someone is not going to read the prospectus then why think they are going to read the disclosure documents you layer on top of it? Why think they will read the forms you give them to fill out?

All this will do is create more opportunity for lawsuits and interfere with the investing of informed people who see a legitimate need for the fund- assuming there are any.

As I said- we have an investment that few should ever have bought. It appears to have fully disclosed what it was doing. Some people, apparently, ignored those disclosures and bought it anyway. They could just as well speculate on penny stocks, options, or put the rent money on a horse.

Some people make bad decisions. They are free to do so. There is nothing to be done.
Last edited by afan on Thu Apr 23, 2020 4:25 pm, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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