Here is why ETFs suck

[asiaprop]

Again, the explanation for the underperformance is very simple, no conspiracy theories. As Cutten pointed out there is one simple reason: Contango. You will see that this underperformance vanishes when you plot or measure the USO ETF performance vs an investment strategy that rolls over the front month future each momth at random dates in the month that leads to the last trading day

Quote from intradaybill:

I don't think all the points made in the article as correct. I agree there is an issue with front-running but cost in futures trading is not calculated as a percentage of price but it is on a per contract basis. Of course USO may need to buy/sell more contracts to balance the fund but the cost will not rise as much because of front-running. It will certainly increase volatility but will not affect performance that much. IMO the reason of the underperformance is the calculation of contracts needed to rebalance based on fund inflows/outflows rather than on price rise/fall of the underline.

Isn't that simpler than thinking in terms of conspiracies?

 

[LEAPup]

Quote from risktaker:

This has happened before. It's a 'known' problem.

Another reason why etf's do suck.

And I agree!!! ETF's 'sound' like the perfect way to buy oil, ng, real estate, indices, etc., but they're not!

Now playing options on ETF's is a different story. Lol

 

[asiaprop]

incorrect, options on those ETFs are the absolute same story. For long term plays try to isolate stocks that have a relative pure exposure to only natural gas or only oil. There are quite a number choices. When you correlate them with oil or natural gas spot they do work actually quite well. Of course you need to adjust for the beta and trade some broad market index against it to isolate the sector specific exposure and for that equity index futures should do just fine.

Quote from LEAPup:

And I agree!!! ETF's 'sound' like the perfect way to buy oil, ng, real estate, indices, etc., but they're not!

Now playing options on ETF's is a different story. Lol

 

[LEAPup]

Quote from asiaprop:

incorrect, options on those ETFs are the absolute same story. For long term plays try to isolate stocks that have a relative pure exposure to only natural gas or only oil. There are quite a number choices. When you correlate them with oil or natural gas spot they do work actually quite well. Of course you need to adjust for the beta and trade some broad market index against it to isolate the sector specific exposure and for that equity index futures should do just fine.

Great post! I agree. Thanks!

 

[LEAPup]

Just wish I understood more of what you just said asianprop.

I'm finding I have that little bit of options "knowledge to be dangerous."

 

[Specterx]

Quote from Cutten:

Also, I would imagine most traders of USO aren't capitalized enough for the futures contracts. For them it's a choice of pay for the roll slippage, pay slippage in the options, or don't trade oil at all.

You're implying you've got the secret solution to this problem. What other way is there to play the long term swings in oil, for those of us who don't have access to storage facilities?

Only other way I can think of would be to buy a basket of oil-company stocks (like asiaprop suggests). But I haven't investigated the ins and outs of this strategy.

 

[matgallis]

Doesn't the USO oil fund also correlate with natty gas prices and heating oil?

 

[morka]

1. long oil futs.
2. short USO.
3. profit ?

 

[Kicking]

There is no scam. You have toi understand how the product works. You didn't do any research and obviously didn't read any of the numerous articles on USO done by people who did the research for you.