Mom and Pop Piled Into Biggest U.S. Oil ETF During Historic Rout

(Bloomberg) -- The historic rout in oil this week has done little to deter mom and pop investors who are convinced they can see a bottom for the beleaguered commodity.

The number of investors at retail trading platform Robinhood piling into the biggest oil ETF, the United States Oil Fund LP (USO), spiked to 152,073 at the end of Tuesday, according to Robintrack, a website unaffiliated with the site that uses its data to show trends in positioning. That figure was up more than 50,000 from Monday and 90,000 from the end of last week, making it the most-added security across the trading venue.

The demand for the oil ETF came as the price of crude tumbled to historic levels, with retail investors speculating in some instances that oil at $1 a barrel had nowhere to go but higher. But USO isn’t a direct bet on oil prices, and incurs costs from rolling its futures positions that hamper performance when longer-dated contracts cost more than the current one.

“There’s a huge cost of carry in the front of the curve and the average Robinhood USO buyer and USO call buyer doesn’t know that, doesn’t understand that, or doesn’t care, and thinks they’re just buying oil at a low price,” said Benn Eifert, chief investment officer at QVR Advisors.

Mom and Pop Piled Into Biggest U.S. Oil ETF During Historic Rout

USO fell 10% to $2.52 as of 12:54 p.m. in New York, headed for a ninth straight day of losses. It’s down 37% so far in April.

With the price so low, the fund announced a one-for-eight reverse share split on Wednesday, a move it said is designed to ensure the shares trade above levels exchanges require for continued listings. It also said the move is “expected to increase the marketability and liquidity” of the shares.

Some ETF experts believe the split may be designed to attract more interest from retail investors.

“That’s what these things do, as they don’t want it trading less than $1,” Christian Fromhertz, chief executive officer of Tribeca Trade Group in New York. “It’s just making it a higher stock price to suck in more retail.”

An email to a Robinhood spokesman was not immediately answered.

Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research, said the split, which will increase the price eight-fold, aims to make the ETF more palatable.

“Reverse splits are designed to make potential investors believe the security has greater value than before as it is harder to consider buying a low single digit priced fund,” he said.

Most of the recent USO buyers now own a product that’s much different than it was a week ago. The ETF used to maintain a position in only the front-month West Texas Intermediate contract, but announced on April 16 a shift to having 20% of its exposures in the second-month.

Since then, the fund said it could hold West Texas Intermediate futures at any point in the curve, and now holds 40% in the front month contract, 55% in the second month, and 5% in the third. These tweaks help guard against the possibility that the cumulative value of its holdings could turn negative.

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