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Bob Kargenian’s Letter to the Editor Published in Barron’s

Bob Kargenian was quoted in a Letter to the Editor in Barron’s, a weekly newspaper that covers financial information, relevant statistics, and market developments.

Bob Kargenian said, “Authors Avi Salzman (in the cover story) and Simon Constable (in the sidebar, “How Investors Can Ride a Rally in Commodities”) recommended the United States Oil fund, an exchange-traded fund designed to track the price of oil, as a way to potentially profit from a rise in the commodity’s price.

“Since its inception in April 2006, this fund has done anything but track the price of oil. That’s because a vast majority of the time, the fund suffers from the effects of contango in West Texas Intermediate crude oil. Contango is when the near-month contracts for WTI are cheaper than the contracts for later delivery dates.

“Because USO invests in the near-month contract, every month it must roll its contracts forward to the next month. When the market is in contango, which is most of the time, the fund has to pay more, which ends up costing shareholders.

“Witness the effect in 2017, when WTI rose from about $52 per barrel to $60, or about 15% for the year. In contrast, the USO fund gained about 2.5% for the year. Only when crude is in backwardation, which is the opposite of contango, would it make sense to own this fund.

“As I write, there is actually a slight backwardation to the market, with February 2018 crude at $60.37 and April 2018 crude at $60.30, but good luck getting that distinction correct over time.”

Read Bob Kargenian’s Full Quote (login required)

By Steve Medland | TABR in the News