Oil ETF benefitting from backwardation

|By:, SA News Editor

Know your ETF. The United States Oil Fund (USO) has returned just 0.6% annualized over the last 3 years even as WTI has gained 30%. The reason is its reliance on the futures market. With the market in its normal state of contango (out prices are higher than near prices), buy and hold gets creamed as contracts are rolled over.

USO's strong performance this year has much to do with a futures market in "backwardation" - near term contracts are priced higher than longer-term ones. Unless you believe it's going to continue - and Newedge's Robbert van Batenburg says backwardation is extremely rare in WTI oil - it may be best to leave USO to the fast-money crowd.

Oil funds that might enjoy a return to contango include USL and DBO, but perhaps the best way to play is through oil companies which benefit from a market allowing them to sell forward at better prices. The SPDR S&P Oil & Gas Exploration ETF (XOP) is an interesting ETF candidate.

Related energy ETFs: U.S.: IEO, IEZ, IYE, PXE, PXI, XES, XLE, XOP, VDE, RYE, FXN, OIH, PXJ, PSCE, ERX, DIG, ERY, DUG, DDG.

Related oil ETFs: OIL, USO, DBO, OLO, USL, CRUD, UCO, DTO, SCO, SZO, DNO, UWTI, DWTI.