Good Money Keeps Following Bad With Oil ETFs

Here is a real world example of good money going after bad. The United States Oil Fund LP (ETF) USO, which tracks front month West Texas Intermediate futures, plunged 46 percent last year, but that did not stop traders and investors from pouring nearly $3.1 billion into the exchange traded fund.

With bullish forecasts for oil prices in 2016 hard to come by and the fact that the S&P GSCI Crude Oil Total Return Index, which is tracked by the iPath S&P GSCI Crude Oil ETN OIL losing nearly 11 percent in the first five trading days of 2016, one would think those factors would be enough to prevent market participants from continuing to catch the falling knives known as oil ETFs. 

"After a 2-day loss of 8.2% in the S&P GSCI Excess Return index, that Feb 1999 bottom is history… Now the index blew through the 1999 bottom, and intraday broke the 1994 bottom to set the index all the way back to the lowest level seen since March of 1989. That is a 27 year low. During the day, the index recovered but is now flirting with and is only 55 basis points away from that 1989 level," said S&P Dow Jones Indices Global Head of Commodities and Real Assets Jodie Gunzberg in a note out Tuesday. 

Related Link: Deutsche Bank Says $55 Oil Predicted Weeks Ago Now Seems Unreasonable

Oil's ongoing weakness is not chasing investors from oil ETFs. In fact, that continuing weakness is emboldening some to keep betting on an oil rebound. As of Jan. 11, USO had added nearly $113 million in new assets on a year-to-date basis. Some traders are really playing with fire as highlighted by the almost $179 million in 2016 inflows into the VelocityShares 3x Long Crude ETN UWTI.

Not-so-fun fact: UWTI, which attempts to deliver triple the daily returns of WTI futures, plummeted 91.9 percent last year. The ETN closed below $3 on Tuesday, which, though it is admittedly speculation at this point, is a price area where a reverse split could come into play.

"If this drop is like the 2008-9 drawdown then oil needs to fall to about $27; however, with the supply like the 80’s and the Chinese demand slowdown like the global financial crisis combined, this period may be worse," adds Gunzberg.

That is an ominous prognostication to be sure, but ominous or not, investors are not shying from equity-based energy ETFs, either. For example, as of January 11, the Energy Select Sector SPDR XLE, the largest equity-based energy ETF by assets, had added $188 million in new assets this year. That is a total exceeded by just eight other ETFs and comes after XLE lost 21.5 percent in 2015, making it the worst-performing sector SPDR for that year.