The great divergence between the USO fund and WTI spot prices

ABSTRACT

This paper discusses the concept of the ‘roll yield’ and its impact on the performance of ETFs that invest in futures contracts of storable commodities. It argues that comparing the returns of a futures position to the returns of a spot position can be quite misleading. As a case study, it examines the returns of the USO exchange traded fund whose investment objective is to mimic the performance of WTI prices using futures contracts. A simple regression model shows that the significant underperformance of the USO fund relative to WTI spot prices has been caused by the prolonged contango market and the steep WTI futures curve in the post-2009 period.

KEYWORDS:

• Contango
• WTI oil futures
• roll yield
• USO ETF

JEL CLASSIFICATION:

• G12
• G13

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Bessembinder et al. (2016) also show that in the shorter period up to 2013 the USO underperformance can be explained by net crude oil storage cost which by standard no-arbitrage arguments is related to the slope of the oil term structure.

² On 20 April 2020, the futures contract with maturity on April 21 turned negative for the first time since the inception of the WTI futures market.

³ The total annual fund operating expenses of the USO fund are 0.76%.

⁴ Not that in April 2020 the USO changed its allocation structure to WTI futures contracts and increased its exposure to longer-dated futures contracts because CME imposed caps on contracts positions.