One of the hottest topics of debate among investors over the past six months has been when/if to invest in crashing crude oil.
By far, the most popular oil ETF is the United States Oil Fund, LP (NYSE: USO), which has nearly 16.5 million average daily trading volume. But should investors be dumping USO and buying the United States 12 Month Oil Fund, LP (NYSEMKT: USL) instead?
Unfortunately, the unsatisfying answer to that question is “it depends.”
How Oil ETFs Work
Many oil ETFs invest in oil futures contracts. An oil futures contract is a commitment to buy a given amount of crude oil at a given price on a particular date in the future.
Since the purpose of oil ETFs is only to serve as an investment vehicle to track the price of oil, the creators of the fund have no interest in stockpiling actual oil. So, oil ETFs such as USO, periodically “roll over” their futures contracts by selling the contracts that are approaching expiration and buying contracts that expire farther into the future.
The Contango Problem
While this process of continually rolling over futures contracts may seem like a great way to track the price of crude oil, there’s a practical problem with the method: contango. The rollover method would work perfectly if oil funds could sell their expiring contracts for the exact same price that they pay for the futures contracts they buy each ...
/www.benzinga.com/general/education/15/01/5147732/think-twice-before-buying-a-top-oil-etf alt=Think Twice Before Buying A Top Oil ETF>Full story available on Benzinga.com
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