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United States Oil ETF faces probe over shareholder disclosure, report says

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Oil exchange-traded-fund USO is being investigated by US regulators over whether its risks were properly disclosed to investors.

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission have opened probes into the $4.64bn fund, which lost three-quarters of its value in the two months to the end of April, according to a Bloomberg report, citing people familiar with the matter.

The agencies are looking into include whether shareholders of the country’s largest crude exchange-traded fund (EFT) were adequately informed that the ETF’s value would not 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.

On 20 April, the price of the front-month contract for oil expired at a negative price, causing huge losses for USO investors as the fund’s strategy consists of holding the futures contract that has the nearest expiration date and rolling over to the next contract once the expiration date is reached.

The recent oil crisis triggered by excess supply and plunging global demand resulting from the coronavirus outbreak contributed to this unprecedented situation and the fund reacted by changing its strategy towards a more conservative approach that involves buying futures contracts with different expiration dates.

The SEC is now looking into this decision to make sure investors were warned about potential strategy changes and their impact in the fund’s ability to mirror the fluctuation in the price of the underlying asset it tracks, which is in this case oil.

USO has lost nearly 76% of its value since the year started and it is currently trading at $25 per share after the fund performed a 1:8 reverse split to comply with listing rules.

USO etf performance chart

The United States Oil Fund (USO), managed by Oakland-based financial firm USCF, invests in oil futures to track the evolution of the price of this commodity, offering investors the possibility of profiting from price movements through a financial vehicle known as an exchange-traded fund (ETF).

Meanwhile, sources familiar with the matter said that the fund does discloses the risks of a potential oil contango, a situation where future prices are higher than spot prices, which may result in a significant deviation in the performance of the ETF compared to the price of oil prices.

Regulators are advise that ETFs and other similar investment vehicles should try to find more creative ways to disclose the potential risks associated with these financial instruments through interactive and user-friendly materials rather than long-form investment prospectus that are often overlooked, especially by retail investors seeking to invest in commodities.

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    Alejandro Arrieche

    Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.

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