Bottom-Calling Bets on $4.3 Billion ETF Sour Amid Oil Plunge
Bottom-Calling Bets on $4.3 Billion ETF Go Bad Amid Oil Plunge
(Bloomberg) -- Historic turmoil in the oil market is proving painful for investors who just piled into a $4.3 billion energy ETF.
The United States Oil Fund LP, or USO, plunged as much as 12% to hit the lowest since its 2006 inception amid a staggering sell-off in crude. The slide came after investors plowed $1.6 billion into the exchange-traded fund last week -- the best on record. USO said Monday it plans to sell an additional 4 billion of new shares as the ETF approaches its shares outstanding limit, according to a filing with the Securities and Exchange Commission.
USO is a popular choice for retail investors looking to bet on short-term price reversals, buying dips and selling rallies. However, those bets soured Monday. Crude plunged as a deadly pandemic ravaging global economies threatens to erase an entire decade of demand growth, slashing thousands of jobs and wiping out hundreds of billions of dollars from company valuations. The price on the futures contract for West Texas crude due to expire Tuesday fell into negative territory for the first time.
“Traditionally, this product is used to play mean reversion. It also attracts outsiders whenever oil is so low it makes the nightly news,” said Eric Balchunas, an analyst at Bloomberg Intelligence. “So it’s basically an overcrowded bottom-calling trade gone bad.”
While the “create-to-lend” process -- when new shares are generated for investors to borrow and sell short -- may be behind some of the activity, the bulk of trading is likely retail investors looking for exposure, according to JonesTrading’s Dave Lutz.
“It just means a lot more unsophisticated oil investors are playing oil,” said Lutz, a macro strategist at JonesTrading.
State Street’s $8.6 billion Energy Select Sector SPDR Fund, ticker XLE, dropped as much as 6.4% before paring losses. Meanwhile, $2.6 billion Vanguard Energy ETF, ticker VDE, sank more than 6% before recovering from its lows.
Before Monday’s rout, traders poured money into USO as demand to bet against further declines faded. Short interest as a percentage of shares outstanding on USO -- a rough indicator of bearish bets on the fund -- is currently 0.83%, according to data from IHS Markit Ltd. That’s down from 5.9% on March 12.
USO said last week that it will move 20% of its contracts from the nearest month to the second-traded month. The issuer cited market and regulatory conditions in announcing the shift as coronavirus-related fears open up a gap between plunging prices for the nearest dates and the following month.
The June crude contact settled at $20.43 per barrel on Monday. Meanwhile, the May futures contract -- which expires on Tuesday -- crashed as low as minus $40.32 per barrel, the lowest level in data going back to 1946.
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