Oil ETF Returns Watered Down

ETFs that are supposed to track the spot price of oil have underperformed this year.

In the column Exchange-Traded Funds Miss Oil Gusher, the WSJ’s John Jannarone writes that although oil prices have soared 51% this year, the largest oil ETF, U.S. Oil Fund (USO), has risen 8%.

USO attempts to track the spot price movements of crude oil by buying the near-month futures contract. However, a glut of physical oil has caused spot prices to trail futures prices, a market condition known as “contango”. The net result is that USO’s performance has not kept up with the spot oil market.

USO is not alone in terms of performance problems. An ETF that takes a different approach to the futures market, the U.S. 12 Month Oil Fund (USL), invests in oil futures contracts across a 12-month period and has done better than USO but still lags behind spot prices in 2009.

As an alternative to USO, Jannarone recommends Anadarko Petroleum (APC), an oil exploration company that has broadly matched oil-price rises this year and pays a dividend.

ETFs with material stakes in Anadarko include the Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO) with 7% of the fund invested in APC and PowerShares Energy Exploration & Production Portfolio (PXE) with a 5% stake.

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