Many brokerage firms have failed to heed warnings that oil exchange traded funds (“ETFs”), which are designed to track the price of crude oil, may not be appropriate for inexperienced retail investors. Analysts have warned against individuals owning oil ETFs for years due to the outsized losses that can occur in periods of market stress as seen in the recent financial crisis. Underlying such warning is that oil ETFs involve the risks associated with trading commodities, which are tied to real-world supply and demand factors. The current glut in the oil market as a result of shuttered factories and grounded travelers highlights the risks inherent in trading such ETFs.
Nevertheless, investors have poured billions of dollars into such funds in 2020, like United States Oil Fund, L.P. (symbol: USO), hoping to correctly wager on a recovery of the price of oil. However, retail investors may mistakenly believe that such ETF is a proxy for investing in the current cash (or “spot”) price for oil. The purpose of the fund was to track as closely as possible the front-month oil futures contract. However, the price of futures contracts farther out in time are now well more expensive than the earlier or front-month contracts. Every month USO and other similarly structured ETFs need to close out their futures positions by buying the next month’s more expensive contract. As a result, investors will undoubtedly see a significant decline in the value of their investment.
If your broker recommended the purchase of oil ETFs, like United States Oil Fund, in your brokerage account, you may be able to recoup your losses under applicable state and/or federal law. Please contact us for a free confidential consultation.
Gregory B. Simon Law, LLC is a national securities law firm that provides legal services to investors and financial advisors on a wide range of financial industry matters. For more information on the firm, please visit https://www.gregsimonlaw.com.