There's a good deal more in the article.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.”
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:
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 saidThe 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...
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.