Sinking Oil ETFs Devour Foolish Money

August 05, 2015

"Never catch a falling knife." That's one of the age-old adages of market wisdom that gets bandied about whenever markets are dropping. The phrase, of course, suggests that if you buy a steeply and rapidly declining asset, you're likely to get cut.

That's exactly what's happened to the bold but foolish traders who entered in the oil market in July. With a 21 percent loss, the month was the worst for oil futures since the financial crisis in 2008. That's sent oil-linked exchange-traded funds reeling, just as traders plowed hundreds of millions of dollars into them.

Based on the fund flows tool, inflows into the United States Oil Fund (USO | B-100)―the most popular oil fund, with $2.5 billion in assets―totaled a whopping $821 million in July.

Even more startling were the inflows into the VelocityShares 3X Long Crude Oil ETN (UWTI), a leveraged product that aims to deliver three times the daily return of oil futures. Inflows into this fund totaled $654 million in July, a massive sum for an exchange-traded product that has $956 million in total assets.

Most of UWTI's inflows came during the beginning of the month, while USO's were spread more evenly throughout the period.

Regardless of when traders bought into the funds, they're likely down big. USO fell 22 percent in July, while UWTI shed 54 percent. Both products are trading near all-time lows, so by definition, everyone who is long is losing money.

This is not to say things can't turn around. Oil could rally in the coming days, weeks or months. If that's the case, perhaps these traders who've bought these products are smart, nimble bargain hunters who are getting in on the ground floor of an eventual oil turnaround.

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