An ETF for a Wild Oil Market

Episode Summary

Executive Summary: The episode examines a lesser-known oil ETF, USE (USCF Energy Commodity Strategy Absolute Return Fund), as an alternative to the popular USO. The discussion explains how USE trades energy futures more flexibly with long, short, and spread positions, why its “absolute return” label may overpromise, and how it differs on volatility and tax treatment. The hosts emphasize that commodity ETFs remain complex, risky, and best handled with caution.

Main Topics: USE as an alternative oil ETF (Priority: 5/5): The segment introduces USE as a hidden-gem alternative to USO, designed for investors seeking a more dynamic and potentially less volatile way to gain energy exposure. How the fund trades energy futures (Priority: 5/5): Andre explains that USE is actively managed and can take long, short, or spread positions across crude, natural gas, gasoline, diesel, and gas oil futures. USO versus USE structure and risk (Priority: 5/5): The hosts compare USE with USO, noting that USO is more mechanically long-only and highly sensitive to futures rolling effects, while USE has more flexibility but still carries commodity-futures risk. The meaning of 'absolute return' (Priority: 4/5): The episode questions whether USE’s name implies too much, since the fund does not reliably generate positive returns in both up and down markets despite the label. Commodity futures, contango, and roll costs (Priority: 4/5): The conversation explains why oil futures can be punishing for retail investors, especially because rolling contracts can create hidden costs in markets like oil. Tax structure and the absence of K-1s (Priority: 4/5): The fund’s structure is presented as a tax advantage versus some commodity products, with a focus on avoiding unexpected tax bills and K-1 forms.

Key Arguments: USE offers broader and more flexible exposure to energy commodities than USO because it can go long, short, or use spreads rather than only buying futures. Despite the 'absolute return' name, the fund does not appear to deliver consistently positive returns in both rising and falling markets; it still behaves closely to oil beta. USE may be somewhat less volatile than USO because active management and offsetting positions can reduce downside exposure. Commodity futures ETFs are inherently risky and complex because rolling contracts introduces costs tied to contango/backwardation and storage economics. USE’s ETF structure is more tax-friendly than older commodity structures because investors are less exposed to unexpected fund-level tax liabilities and K-1 paperwork. For investors who want oil exposure without fully embracing USO’s rigid front-month approach, USE is presented as a more nuanced, though still small and expensive, option.

Data Points: USE year-to-date return: 83% - Andre compares USE’s YTD performance against USO and WTI crude. USO year-to-date return: 186% - Used as the benchmark comparison for USE performance. WTI crude year-to-date return: 153% - Comparison point showing USE lagged the broader crude move. Third-quarter performance: about 35% - Hosts note USE, USO, and WTI were all roughly up 35% over the quarter. Expense ratio: 79 basis points - The fund’s cost level is described as relatively high. Assets under management: $7 million - USE is characterized as very small in asset size. Momentum screen volume threshold: at least a 50% jump - Andre explains Bloomberg’s screening for ETF of the moment candidates.

Pivotal Quotes: "It's saying, I'm giving you a return whether the markets are going up or down because of my ability to go long or short." — Andre Yap: Explaining what the phrase 'absolute return' seems to imply in USE’s name. "The more cumbersome the commodity is to store, like oil or corn, the more the market knows that and it's going to price up the next month." — Eric Baltrunas: Describing why futures roll costs can be especially painful in oil-related ETFs. "It still touches futures, so it's still buyer beware somewhat." — Andre Yap: Clarifying that USE remains a commodity-futures product with inherent risk.

Implications: Listeners should treat commodity ETFs as specialized, high-risk tools rather than simple stock-like investments. USE may be more flexible and tax-efficient than USO, but it still faces futures-curve and performance risks that can surprise retail investors.