ETF Investors Have Spent $24 Billion Trying to Call a Bottom in Oil
They could have gotten together and bought an island or maybe even 12,000 copies of that Wu-Tang album.
But instead, a wide range of investors collectively spent about $24 billion over the past 18 months trying–and failing–to call a bottom in oil. Never in the history of exchange-traded funds has one particular category drawn so much money from investors trying to play a rebound. Of course, not all this money is gone (yet), although certainly a lot of it has evaporated along with the price of crude.
During that time, investors plowed $12 billion into ETFs that track oil stocks while plowing another $12 billion into ETFs that track oil futures. The table below shows the two most popular ETFs in each category–but more importantly, it shows that this trade was popular with almost every kind of investor, from the most professional of traders, including hedge funds, to "mom and pop" retail investors.
The SPDR Energy Select Sector ETF (XLE) tracks oil-related stocks such as Exxon Mobil, Chevron, and Schlumberger. This ETF is popular with asset managers and traders alike, thanks to its oceanic liquidity and its diversification. The Vanguard Energy ETF (VDE) does the same thing but is used almost exclusively by advisers and retail investors. (Yes, even grandma thought oil would come back).
On the other side of the tracks, you have the United States Oil Fund (USO), which holds near month Nymex futures on WTI crude oil. The trader and hedge fund crowds prefer USO because it is the most sensitive ETF to short-term pops in spot oil. It is also very liquid and offers the convenience of rolling the futures for you, although it suffers from severe roll costs if held over the longer term.
Then there is the VelocityShares 3x Long Crude ETN (UWTI), which took in more money than any other leveraged ETF during this time–all while losing 98 percent of its value. Although in all fairness, it did have a few sweet jumps when it returned more than 15 percent in a day. Only the most hard-core traders use this one, as it comes with the rare triple whammy: leverage, roll costs and credit risk. (If ETFs got movie ratings, UWTI would be NC-17).
No matter which path they chose, the trade has been a disaster, as seen in the chart of USO and XLE below.
Although admittedly, if investors timed a short-term trade absolutely perfectly, they may have made some money.
Bottom-calling in ETFs is nothing new, but spending this much money on it certainly is.
In 2013, investors went wild trying—and also failing—to call a bottom in gold miners. The difference here is they spent only $3 billion mining the bottom in gold, vs. the $24 billion spent diving for the nadir in oil. The Market Vectors Gold miner ETF (GDX) took in almost all that cash and has lost 46 percent since. Then, in 2014, investors spent $1 billion trying to play a rebound in Russia. The Market Vectors Russia ETF (RSX) was the major recipient of that cash and has lost 45 percent since then, albeit with some nice bounces in between.
In all these cases, we witnessed a rare phenomenon that exists in only the most extreme bottom-calling scenarios. It is when the price of the ETF hits an all-time low while the shares outstanding hit an all time high. That is exactly what is happening right now with USO as shown in the chart below. That is a wide, scary mouth, and it is gobbling up investor cash.
When you see a chart like that, it means investors are losing their shirts.
And in the case of energy ETFs, it’s a whole lotta shirts—from bespoke button-downs to typical tees–from a whole range of investors.
Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. This piece was edited by Bloomberg News.