Israel – Iran War: Read This Before Investing in an Oil ETF

Why oil ETFs may not behave as expected

Let’s use the United States Oil Fund

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 jumping into 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%.

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 (asides 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. As the chart below shows, the compounding effect of contango can cause the ETF’s value to significantly underperform the actual movement in crude oil prices.

In the short term, USO can be an imperfect but acceptable tool for speculating on oil prices. If your goal is to make a directional bet on crude over a few days or weeks, and you understand the risks, it can serve that purpose.

But it’s absolutely crucial to have a clear exit plan. USO is not designed to be a long-term hold. because of the structural drag from rolling futures in contango, the longer you hold it, the more likely your performance will diverge negatively from actual oil prices.

Why you may get a nasty surprise come tax time

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. First, the K-1 form itself is long, tedious, and often confusing, especially for investors who’ve never filed one before. Even if you work with a tax professional, many accountants consider K-1s a headache.

Second, K-1s tend to arrive late, sometimes well into March or even April, which can delay your ability to file on time. If you file your own taxes, expect a steep learning curve and frustration.

You can avoid this by choosing ETFs that explicitly advertise “No K-1” in their name or prospectus. But most investors simply pick the first oil ETF they find, often USO, and only realize the paperwork hassle when it’s too late.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.