The mess in the USO ETF continues to unfold as it trades 7.8% above NAV

Author: Adam Button | Category: News

This ETF is doomed

A popular take is that the May NYMEX oil contact isn't representative of crude because at this point it's oil for physical delivery while the June contract is a more liquid futures contract.

It's the opposite. The May contract represents the real demand for physical crude while the June contract is puffed up by retail money.

A full 25% of the June futures contract is now owned by the USO ETF and that will rise above 30% once pending trades are processed. It's an instrument used by retail traders to bet on one-day moves in oil. It's very likely that tourists in the oil market thought they were buying crude at $1 today or at negative prices in the May contract. In reality, they were buying an 80/20 split in the June/July contracts trading at $22/$27 respectively. These can fall much further.

Moreover, all the money flooded into the ETF faster than the managers could create new units. As a result, the ETF finished the day at $3.75 but with a net-asset value of $3.46, according to data just released. That's a 7.8% premium.

What's happened in the ETF is truly mind-blowing. Look at the massive number of newly-issued shares along with the unprecedented rise in volume today.
This ETF is doomed
The ETF alone now has $4 billion in assets and was the most-traded instrument on Robinhood yesterday.

Starting May 5, The June/July contracts will need to be sold and rolled into July/August contracts.

In the day or two ahead I expect more retail money to be ploughed into this ETF.

It's a similar story in UCO, which is a 2x levered oil ETF. IT closed at $1.35 and its NAV is $1.21 and holds July contracts among other things. Add it all up and we have a retail slaughter in the making.
See here for global coronavirus case data
By continuing to browse our site you agree to our use of cookies, revised Privacy Notice and Terms of Service. More information about cookiesClose