Exchange Traded Fund (ETF) has become very popular in recent years. However, it appears to me that many people misunderstand the functions and abilities of ETFs
Today, I am going to just share a simple example of Contango Trap in Commodity ETF which deteriorate the return of your investment. After 2008 financial market crash, a lot of people jump into U.S. Oil Fund (USO), hoping a big gain from the underlying crude oil market. However,the ETF never delivers the return which many people expected to be.
You can easily tell the significant difference from the chart below.
Source: http://www.dailymarkets.com
This is because when the future contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; however, during the time, they have to pay much higher price to buy back the same contract they just sold, resulting a loss. This phenomena is called Contango.
And who is the biggest winner in these trades, when your portfolio is bleeding? They are always the banks and financial institutions which you trust the most. I won’t go to details about how they make the money, but you should always seek for professional advice before going into any such investments.