Oil futures ETF

Thrugelmir

gays_on_crack said:

Being forced to take physical possession of oil is not a risk.

An ETF might have bought May oil futures contracts. I.e. for so many dollars, they have the right to receive so many barrels of oil in May. Before that happens, the ETF will need to sell the May contracts, and buy June contracts instead. That is rolling over. (And they'll need to do the same next month, and so on.)

With May WTI contracts negatively pricing that's a huge financial hit . The real danger with leveraged positions on the futures markets. Small upfront cost with unlimited exposure. 

EdGasketTheSecond

Thrugelmir said:

gays_on_crack said:

Being forced to take physical possession of oil is not a risk.

An ETF might have bought May oil futures contracts. I.e. for so many dollars, they have the right to receive so many barrels of oil in May. Before that happens, the ETF will need to sell the May contracts, and buy June contracts instead. That is rolling over. (And they'll need to do the same next month, and so on.)

With May WTI contracts negatively pricing that's a huge financial hit . The real danger with leveraged positions on the futures markets. Small upfront cost with unlimited exposure. 

With an ETF you can only lose what you invested; nothing more.

Username999

EdGasketTheSecond said:

With an ETF you can only lose what you invested; nothing more.

Hmmm, not 100% true.
If you use Margin.

bowlhead99

EdGasketTheSecond said:

Thrugelmir said:

With May WTI contracts negatively pricing that's a huge financial hit . The real danger with leveraged positions on the futures markets. Small upfront cost with unlimited exposure. 

With an ETF you can only lose what you invested; nothing more.

Username999 said:

EdGasketTheSecond said:

With an ETF you can only lose what you invested; nothing more.

Hmmm, not 100% true.
If you use Margin.

Fortunately if you are an individual you can buy whatever you like, at whatever price you can afford, using what leverage you can get, and sell to whatever buyer you can find. 

Whereas if you're an investment fund with a known strategy  (such as buying front-month oil futures) and you keep taking in new money, at some point you may run into a problem of not having the freedom to operate as you had planned, and all the other people in the market may know that you have that problem before you can extricate yourself from it. 

USO for example had billions coming in during March and April from investors and all the money had to go somewhere, so it went into their strategy of buying front-month oil futures. But by buying so many, they ended up with a position which would break the CFTC's position limits which say that one buyer can't hold more than 25% of the deliverable supply of a particular contract.  So, not only did they have a huge position to roll from one month to the next as they approached the two week window before maturity of the May contracts - with the June contracts being priced more than 30% higher than the May contracts at the end of last week, ouch... they also had the problem that they couldn't simply spend all their money buying up all the June contracts when dumping their May contracts, because of the concentration rules. So, they had to split their money and divert about a fifth of it to buying July contracts (and the differential between June and July was not as bad as the one between May and June).  

So now they have a different strategy for the forseeable and will roll about 20% of the portfolio an extra month ahead rather than the remaining 80% which will continue to roll just to the next expiring month ahead. Which should help them out, but will give different results going forward than what the investors thought they were getting when they piled in over recent weeks, which must be annoying when you are nursing losses, especially if you made losses elsewhere and bought oil futures because you thought you'd make a killing and be back in profit soon.

No doubt some of the various risks around futures contracts and ETF structuring were mentioned in a prospectus. But as we've seen discussing ETFs on threads here in recent weeks, most people don't read the prospectuses or understand them, they just tick a box on their broker website saying yeah yeah I seen it, oil seems to be getting a bit cheap, now lemme buy it. For a week around New Year, USO stock was trading at above $13 a share. Today $2.94.

bargainhunter888

i think sometimes prospetus are dificult to understand and being on a forum with experience someone can put them in laymens terms to someone less experience, i can follow maybe 50% of your posts, but it would be a lot easier than what the prospectus says 

Thrugelmir

EdGasketTheSecond said:

Thrugelmir said:

gays_on_crack said:

Being forced to take physical possession of oil is not a risk.

An ETF might have bought May oil futures contracts. I.e. for so many dollars, they have the right to receive so many barrels of oil in May. Before that happens, the ETF will need to sell the May contracts, and buy June contracts instead. That is rolling over. (And they'll need to do the same next month, and so on.)

With May WTI contracts negatively pricing that's a huge financial hit . The real danger with leveraged positions on the futures markets. Small upfront cost with unlimited exposure. 

With an ETF you can only lose what you invested; nothing more.

As old as the hills for good reason. First rule of investing is doesn't lose capital. Second rule of investing is don't forget rule no one. 

Username999

annabanana82 said:

Futures and CFD's came up in my last exam, goodness knows why as I'll never use it in my job. I scraped through with 53% pass as it just goes way over my head

What sort of exam, farming?

strawb_shortcake

Username999 said:

annabanana82 said:

Futures and CFD's came up in my last exam, goodness knows why as I'll never use it in my job. I scraped through with 53% pass as it just goes way over my head

What sort of exam, farming?

Chartered institute of Purchasing and Supply, I understand that it will apply to some of my sector but in the public sector where I am. 
Farming I may have done better in...

bowlhead99

bargainhunter888 said:

i think sometimes prospetus are dificult to understand and being on a forum with experience someone can put them in laymens terms to someone less experience, i can follow maybe 50% of your posts, but it would be a lot easier than what the prospectus says 

The problem with that approach, is that the bits I can easily put into laymans terms without using as much space and classroom time as the prospectus says to say it, are the easy bits. The more complex bits, I can't be bothered to go into, or if I did go into them, your eyes would glaze over. I am not some genius academic, and we all have our own knowledge levels - there are some topics I would skip myself because I would glaze over too; I just know enough about what I need to know and about what I need to know that I don't know.

It goes back to that quote by Rumsfeld in the Gulf war some years back: there are known knowns (things we know that we know); the known unknowns (things we know we don't know) but beware the unknown unknowns (things we don't know we don't know). The last group are the trickiest when assessing risk because you don't even know you need to ask about them.

When many people buy a share of an ETF they are exposed to risks that they don't really understand but hope it won't matter that they don't understand, because those things won't come up in the normal course of business and it will be fine. Or those things will come up, because you're investing for the long term and will in due course see everything there is to see, but you're investing for the long term so you expect that the ETF will eventually recover from its structural problem or that you'll have made so much money by then that you won't care.

Unfortunately, if you buy an ETF that you don't fully understand, it can give you a result you don't expect - and not recover in the way that you hope it would, to give you an acceptable result.

So if you are reading the layman's guide to an ETF and understanding half of it, and the layman's version came from the most easy half of the full guide... that puts you at a quarter of the knowledge. You are just gambling that the easiest-to-understand stuff was the most important and the other three quarters probably won't happen because if it was likely to happen and was important, everyone would be talking about that.

It's quite a punt in the dark if you're investing a significant amount of money in the product, which is why asking questions here is good, though the answers probably won't be as good as you could find if you looked further. You'll no doubt think, "but everyone does it, you're not telling me that everyone who buys ETFs understands them...!" which is probably true - but knowing that others probably got caught out too isn't actually a lot of comfort when you have lost your money (or lost more money than you expected).

Simply clicking a button to say you read the Key Investor Document that the FCA said should have been made available to you before you're allowed to invest, may not be good enough to protect you from the stuff you might encounter and didn't know you didn't know. Like the people who bought USO ETF shares in early January and only lost 60% of their money, even though the WTI spot price fell 65% from $63 to $22.4 last Monday ; but then spot has halved again since then, and USO is 75% down since the new year ... 'how does one relate to the other, I thought I was betting on the oil price' some will exclaim. Not the ones putting billions in - they know the risk. It's the people here asking about the 0% commission fintech apps where you can pretend you're a wall street tycoon and trade ETFs from the comfort of your couch while furloughed, who will be crying later.

Thrugelmir

annabanana82 said:

Username999 said:

annabanana82 said:

Futures and CFD's came up in my last exam, goodness knows why as I'll never use it in my job. I scraped through with 53% pass as it just goes way over my head

What sort of exam, farming?

Chartered institute of Purchasing and Supply, I understand that it will apply to some of my sector but in the public sector where I am. 
Farming I may have done better in...

Agricutural sector uses forward contracts all the time. Grain trading in particular.