By Rupert Hargreaves at ValueWalk.
July was the worst month for oil prices since the financial crisis. The price of WTI crude plunged 21% during the month, the worse single-day decline since 2008. Unfortunately, July was also the month that saw record inflows from retail investors into ETFs that track the price of oil.
Last month investors poured $821 million into the United States Oil Fund ETF, which tracks the performance of WTI crude, according to ETF.com. That's not bad for a fund with $2.5 billion in assets.
Further, the VelocityShares 3X Long Crude Oil ETN (UWTI), a leveraged instrument that aims to provides three times the exposure to the swings in oil, saw inflows rise to $653 million — once again an enormous sum in comparison to the size of the fund. UWTI has $956 million in total assets.
Most of the UWTI's inflows came at the beginning of July. During the first week of the month, the fund reported inflows of around $400 million more than half the monthly total. Over the five weeks from the beginning of July to time of writing, the VelocityShares 3X Long Crude Oil ETN is down 63%. Over the same period, USO has fallen 27%. Both Oil ETFs are nearing an all-time low. Over the past twelve months, UWTI is down 96%, and USO is down 60%.
Oil ETFs
Oil ETF's: Retail fails to pick a bottom in oil
According to data from ETF.com, traders have been throwing money at these two exchange-traded instruments since the beginning of the year, without much success (as the figures above show). Since the start of the year, USO inflows have totaled $1.6 billion while those for UWTI have totaled $1.3 billion.
All the evidence points to the fact that most of the speculators plowing money into these funds don't have a clue.
Indeed, both USO and UWTI are designed to track the “daily” movement of oil and shouldn't be held for an extended period. USO has drastically underperformed the “spot price” of oil over the past five years thanks to the "roll costs" associated with tracking oil futures. When the oil market is in a state of contango, as it has been over the past twelve months, USO is forced to pay a higher price when it rolls over its futures contracts. These costs have severely clipped the fund's wings over the past nine years. Since USO launched in April 2006, to January of this year, USO returned -71% while the spot price of oil returned -26%.
Also, UWTI is less than useless for long-term investors. In oscillating markets, UWTI's daily leverage reset can significantly erode returns. A lot. Every day, the fund earns a return, either positive or negative, and it must reset its exposure to maintain a constant multiple to a changing asset base. Compounding takes care of the rest. ETF.com gives a more detailed run-down.
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