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Comment by _delirium | Hacker News Reader

The biggest gap in expectations seems to be that people think they're buying a share in some sort of underlying commodity, as opposed to a rolling series of 1-month futures. It'd be as if S&P 500 index ETFs, instead of holding a weighted index of the S&P 500 stocks, were just buying and rolling over SPY options.

Any particular reason they're 1-month contracts, though? It seems the treading-water aspect would be greatly reduced if these funds could trade, say, 1-year futures. Do longer-dated futures just not exist, or at least not exist in markets that are liquid enough?

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The problem with one year futures is that they do not track the spot price of oil as well. The whole purpose of an oil ETF is for it to give you the ability to buy or sell a bunch of oil at any time without having to deal with the actual oil. Thus, the value of an ETF should track the current (spot) price of oil.

But if the fund buys one year contracts, their costs will not reflect the current price but what people believe the price will be at the end of the year. So the ETF will be mis-priced in relation to the current price. I think that is why they try to buy contracts that are relatively short, because they track the current price better.

  The whole purpose of an oil ETF is for it to give you the
  ability to buy or sell a bunch of oil at any time without
  having to deal with the actual oil.

If that's the purpose, then they were flawed when conceived, because, as the article shows, the ETF´s cannot abstract from the costs involved with dealing with the actual oil.

They do both. For example, compare the ETFs "United States Oil Fund" (ticker USO) with "United States 12 Month Oil Fund" (ticker USL). Every month, USO buys the next month's future as the previous month's future expires. Also every month, USL buys the next year's future as the future bought a year previous expires.

You can look at their charts here: http://bit.ly/ar6Kxm

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