The world’s biggest exchange-traded fund tracking oil is facing U.S. regulatory action after it took a series of extreme steps to survive the historic crude selloff earlier this year.
The Securities and Exchange Commission has issued the United States Oil Fund ETF, known as USO, a Wells Notice about the intended measures, according to a filing on Wednesday.
The fund was being probed over whether it had adequately disclosed risks to investors after it was forced to dramatically reshuffle the mix of futures contracts it tracked during the market turmoil. That helped protect the ETF, but meant deviating from its past investment strategy.
The notice states that the SEC has made a preliminary decision to recommend an enforcement action against the ETF, its Chief Executive Officer John Love and United States Commodity Funds, the company which manages USO. The decision relates to disclosures made in late April and early May.
USCF, USO and Love said they intend to vigorously contest any allegations. Judy Burns, an SEC spokesperson, declined to comment.
It’s the latest dramatic twist in the story of USO, which was at the center of the storm as crude prices plunged earlier this year. As volatility swept the market, it issued six disclosures in less than two months announcing changes to the fund’s investment strategy, and temporarily halted new share creations — potentially untethering itself from the contracts it was tracking.
Despite the drama, the ETF remains a major player in oil futures with more than $4 billion in assets. Industry experts say the SEC notice is unlikely to change that.
“Unfortunately I think many investors wanting to make a bet on an oil recovery as the global economy improves will be undaunted,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “USO is different than previously constructed — and many investors have not budged.”
Despite its complexity, USO has long been a vehicle of choice for many traders playing the oil market.
Even at the peak of the selloff, a record amount of cash was flowing into the fund as investors tried to time the bottom. On April 20 — the day crude prices fell below zero — the ETF attracted more than half a billion dollars.
USO is up about 80% since its low that day, meaning many of those investors will be happy. However any who were betting against the fund would have been burned by the emergency steps it took to protect itself.
Meanwhile there were plenty who were invested before the turmoil hit. Class action lawsuits were filed in June alleging that they weren’t properly warned of the risks involved.
“I suspect the SEC will simply issue fines to the manager and expect procedural changes,” said Dave Nadig, chief investment officer and director of research at ETF Flows. “‘I seriously doubt investors will flee as it’s a bit of a unique vehicle. Yes, there are other crude based ETFs, but none have the name recognition among traders nor the liquidity.”
A Wells Notice is nether a formal charge of wrongdoing nor a final determination that any law has been violated. The fund was at times ordered by exchange operators to make changes to its giant position.
— With assistance from Matt Robinson.