Young investors rush into a struggling oil ETF that no longer even tracks oil prices

Fuel prices are displayed at a Phillips 66 gas station in Princeton, Illinois, United States, Wednesday, April 1, 2020.

Daniel Acker | Bloomberg | Getty Images

Some millennial investors have been duped by a complex petroleum ETF that is struggling to stay alive.

Traders from Robinhood and SoFi Invest flocked to buy the US Oil Exchange Traded Fund, or USO, this week, its price dropped below $ 3. But many entered for the wrong reasons.

Retail investors mistakenly believed that this fund was an indirect indicator of the “cash” or cash price of oil, and they agreed with the fall in its price. he is not: The ETF’s aim is to track the oil futures contract for the first month. And after changing its structure several times in the past week, the fund couldn’t even do it right.

Still, USO was the most bought name on Robinhood, a free stock trading app that has attracted around 10 million users, mostly millennia. On Wednesday, he was among the top 30 most held names on Robinhood, according to the start-up.

Even after a pop on Thursday, the fund dropped 32% this week.

On SoFi Invest – another trading platform used mainly by traders under the age of 40 – USO was “by far” the highest security on Tuesday and Wednesday. Ownership of the USO account has increased from 20% to 30% every day since April 20, according to SoFi. Month-over-month, ETF ownership increased 300%. Meanwhile, USO plunged more than 45% this month, and about 80% this year.

John Davi, Founder and CIO at Astoria Portfolio Advisors, said the average retail investor was probably attracted to the reduced price, and didn’t realize it was a game to buy the futures market instead of the spot oil .

“A handful of low prices are still a retail trap,” Davi told CNBC in a telephone interview. “This ETF is something you want to buy with gloves on and keep it for a short time – it is a trade, not a long-term investment.”

The fund started to run into trouble when the oil contract in May started to plunge last week. This week, the May contract fell to a real negative price. The fund had probably already sold these contracts for the June oil futures, but the fall in negative prices scared the entire oil market. June’s oil futures then started to fall this week as well and traders feared they would turn negative.

This has caused the fund to implement a series of changes from last Friday. The fund, initially created to invest only in the contract from the first month until two weeks before its expiration, said it would now invest funds in futures expiration of months. It also suspended the creation of creative baskets, thus an ETF manufactures new actions to meet demand. The creative baskets buy the futures. But by suspending this mechanism this week, the fund began trading as a closed-end fund with a fixed number of shares. It also meant that he could no longer accurately follow the price of oil.

Individual investors who buy the fund are probably not aware that it is no longer keeping pace with oil prices.

On Wednesday, for example, the fund fell 11% while oil futures in June jumped 20%. Thursday, while oil jumped 30% in June, the USO gained only 12%.

When asked why the fund continues to change structure, the company’s chief marketing officer told CNBC: “Due to the extraordinary market conditions in the crude oil markets, including the super contango, USO has invested in other authorized investments, as described in the prospectus. “

— CNBC’S Pippa Stevens and Bob pisani contributed to the production of reports.

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