The United States Oil Fund (NYSEARCA: USO) is an exchange-traded fund (ETF) designed to provide investors with exposure to West Texas Intermediate crude oil. USO is the largest and most liquid exchange-traded product in the segment and provides commodity exposure requiring a commodity futures account.
To track the daily price movements and provide exposure to WTI crude oil, the fund holds front-month futures contracts on crude oil. For example, as of July 30, 2015, the fund holds 54,786 NYMEX WTI Crude Oil futures contracts that expire in September 2015 at $48.52, and the total market value of this holding is $2.66 billion.
As of June 30, 2015, USO has an annualized return of -12.45% since its inception on April 10, 2006. Based on trailing five-year data, USO has an annualized return of -14.55% as of July 30, 2015. Over the past year, the United States Oil Fund's market value has tanked 56.39% due to an oversupply of crude oil.
The United States Oil Fund is listed on the New York Stock Exchange Arca, and investors can trade the ETF on multiple platforms. The administrator of the fund is Brown Brothers Harriman & Company, and the general partner is the United States Commodity Funds, LLC.
Since the United States Oil Fund must change the composition of the West Texas Intermediate crude oil futures contracts, it must roll its contracts by selling the WTI crude oil futures contracts expiring in the near month and buying the WTI crude oil futures contracts expiring the next month. For example, assume it is the middle of July; the fund will sell its position in WTI crude oil futures contracts expiring in August and purchase WTI crude oil futures contracts expiring in September.
Due to rolling of futures contracts, the fund charges an expense ratio of 0.72%, while its peers charge an average of 0.57%. This ratio does not include broker fees; investors should keep this in mind.
Suitability and Recommendations
Since USO tracks the prices of WTI crude oil, investors should pay attention to the prices of crude oil, as well as petroleum status reports published by the U.S. Energy Information Association. Investors and potential investors should pay particularly close attention to the fluctuations of the barrels of crude oil every week.
As of June 29, 2015, the USO has a trailing five-year alpha of -7.74, a beta of 1.21, a standard deviation or volatility of 26.95 and a Sharpe ratio of -0.26.
Based on modern portfolio theory (MPT), the trailing five-year alpha indicates that the fund has underperformed the MSCI ACWI NR USD Index by an annualized 7.74%. With a beta of 1.21, USO is theoretically 21% more volatile than the market, and therefore, the fund carries more risk. Similarly, USO's Sharpe ratio indicates the fund has not been providing investors with an adequate return given the amount of risk taken.
If crude oil prices continue to slide, USO's trailing alpha would continue to fall and could underperform MSCI ACWI NR USD Index by more than 7.74% and its Sharpe ratio would continue to fall, causing the fund to underperform the risk-free rate of return on a risk-adjusted basis.
USO is a high-risk, high-reward play that is not suitable for everyone. According to MPT, USO is suitable for value investors, traders and speculators who believe crude oil prices are poised to rebound.
Due to the increase in supply of crude oil, the market value of USO has decreased by more than 50% over the past year. Therefore, value investors may view the fund as undervalued and believe the demand for crude oil will increase over the next few years, causing USO to rebound to its previous highs. Similarly, this fund is suitable for traders and speculators who want to gain exposure to WTI crude oil prices after the weekly Petroleum Status Report is released by the EIA.