A popular exchange traded fund that uses complex derivatives to track oil is being investigated by U.S. regulators over whether its risks were properly disclosed to investors, scrutiny triggered by crude’s historic slump during the coronavirus crisis, said three people familiar with the matter.
The Securities and Exchange Commission and the Commodity Futures Trading Commission have both opened probes into the $4.64 billion United States Oil Fund, said the people who asked not to be named because the matter is private. The fund has lost 75% of its value this year.
Issues the agencies are examining, the people said, include whether shareholders were adequately informed that the ETF’s value wouldn’t necessarily move in tandem with the spot price of oil and the fund’s recent decision to purchase crude contracts that expire further out in the future. The change in contracts USO was buying deviated from its past investment strategy.
The inquiries into the ETF, known by its ticker USO, are in their early stages and may not lead to allegations of wrongdoing. United States Commodity Funds, the company that manages USO, hasn’t been accused of any misconduct by the SEC or CFTC.
Senior executives at United States Commodity Funds didn’t respond to multiple requests for comment. Spokesmen for the SEC and CFTC declined to comment.
The investigations are significant because USO has grown to be a dominant player in the market for crude futures. As it got bigger, the ETF attracted legions of mom-and-pop investors who saw it as an easy and simple way to wager on oil. These less sophisticated shareholders are among those who’ve endured heavy losses amid the oil rout, a plunge highlighted by the commodity’s first-ever slide into negative territory on April 20.
USO rose 85 cents to close at $25.88 on Friday.
USO has issued six disclosures to shareholders in the last two months noting changes to the fund’s investment strategy, which it has had to quickly rejigger in response to recent events. In the SEC filings, the ETF has said it’s buying longer-dated futures -- contracts that are typically less volatile than those that expire in the succeeding month.
The shifts have led to concerns that USO could become increasingly disconnected from the spot oil price that it’s long sought to track. For its part, the fund emphasized in a Tuesday filing that it’s not a proxy for trading directly in oil markets, but carries many of the same risks. USO has also issued disclosures this month stating that its daily share moves may not correlate with changes in the price of oil and that “recent and unprecedented volatility” in crude markets demonstrates the potential risks of investing in the fund.
USO buys futures, not physical oil. The fund mainly invests in CME Group Inc.’s benchmark West Texas Intermediate contracts. Its WTI holdings became huge in March as oil plunged, a drop triggered by falling demand during the coronavirus pandemic and a price war between Saudi Arabia and Russia.