Bottom-Calling Bets on $4.3 Billion ETF Go Bad Amid Oil Plunge

Historicturmoil in the oil market is proving painful for investors who just piled into a $4.3 billion energy ETF.

The United States Oil Fund LP, orUSO, plunged more than 10% in pre-market trading, with crude tumbling below $12 a barrel amid an unprecedented supply and demand imbalance. USO’s slide came after investors plowed $1.6 billion into the fund last week — the biggest weekly influx on record for the exchange-traded fund.

USO is a popular choice forretail investors looking to bet on short-term price reversals, buying dips and selling rallies. However, those bets soured Monday as slower demand exacerbates a fast-growing glut of oil.

“Traditionally, this product is used to play mean reversion. It also attracts outsiders whenever oil is so low it makes the nightly news,” said Eric Balchunas, an analyst at Bloomberg Intelligence. “So it’s basically an overcrowded bottom-calling trade gone bad.”

State Street’s $8.6 billion Energy Select Sector SPDR Fund, tickerXLE, dropped 5.7% before the market open. Meanwhile, the $1.7 billion SPDR S&P Oil & Gas Exploration & Production ETF, tickerXOP, fell 6.5%.

USO, which accounts for about 25% of all outstanding contracts in West Texas Intermediate crude futures, said last week that it willmove 20% of its contracts from the nearest month to the second-traded month. The issuer cited market and regulatory conditions in announcing the shift as coronavirus-related fears open up a gap between plunging prices for the nearest dates and the following month.

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