Oil prices are climbing again amid Middle East tensions. On the finance side, this has reignited investor interest in oil ETFs. But if you weren’t around for the wild ride of the 2020 Covid oil crash – and the flood of panicked questions from investors confused about why their oil ETFs didn’t match oil prices – now’s a good time for a quick reality check, explains Tony Dong, lead ETF analyst at ETF Central.
There are two key warnings to keep in mind before hitting “buy.” First, your oil ETF may not track oil prices the way you think it does. Second, many of these ETFs come with tax complexities that could cost you dearly at filing time.
Let’s use the United States Oil Fund (USO) as an example — not because it’s a bad ETF, but because it’s the most well-known and often the default choice for new investors looking to add oil exposure. USO doesn’t hold actual barrels of oil. Instead, it tries to match the average daily percentage change of its net asset value (NAV) to that of the front-month WTI crude oil futures contract over rolling 30-day periods, staying within a range of plus or minus 10%.
United States Oil Fund (USO)
You’re getting exposure to futures – currently, for example, the August 2025 WTI contract. USO also uses financial tools like swaps with counterparties (e.g., Macquarie or Société Générale) and puts some cash into institutional money market funds as collateral.
The biggest reason why USO doesn’t line up with oil prices over the long run (aside from expenses) is a market phenomenon called contango. That’s when the futures price for oil is higher than the spot price.
ETFs like USO that hold front-month futures contracts must roll them over each month — selling the near-term contract and buying the next one out. If the next-month contracts are consistently more expensive, the fund ends up “selling low and buying high” each time it rolls forward, creating a drag on performance called negative roll yield.
In the short term, USO often moves in the same direction as oil prices. But over time, especially when contango is steep, that tracking breaks down.
The other issue you won’t immediately realize after trading USO, regardless of how long you hold it, is the Schedule K-1. This tax form isn’t something most ETF investors expect, but it’s common with commodity funds structured as limited partnerships, like USO.
Unlike traditional equity ETFs, which typically send out a straightforward T3 or 1099 tax form, funds like USO must issue a K-1 to report each investor’s share of the fund’s income, gains, losses, deductions, and credits. This is because of the partnership structure. For you, this means more complexity at tax time.
