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Brokerage Warning Issued for Oil-Linked ETPs, Including US Oil Fund

FINRA issued a regulatory notice for oil-linked exchange-traded products (ETPs), such as exchange-traded notes and funds (ETNs, ETFs) including oil-and-gas giant United States Oil Fund (USO).

The notice warns firms about the suitability of oil and energy ETP sales for retail customers in a volatile market, especially with products linked to West Texas Intermediate (WTI)'s crude oil price, such as USO.

FINRA specifically pointed to the largest oil-related ETP having lost 41% of its value in one week during April 2020's WTI volatility (US Oil Fund lost 40%+ of its value) and wrote that commodity futures-linked securities can perform differently than the spot price for the commodity itself.

Other 2020 oil & gas ETF losers, according to ETF Trends, sorted by worst year-to-date returns as of May 20, 2020 include:

1. ProShares UltraPro 3x Crude Oil ETF (OILU): -99%.

2. VelocityShares 3x Long Crude Oil ETN (UWT): -98.85%.

3. ETRACS ProShares Daily 3x Long Crude ETN (WTIU): -98.47%.

4. Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3x Shares (GUSH): -97.59%.

5. ProShares Ultra Bloomberg Crude Oil (UCO): -95.64%.

6. ETRACS S&P GSCI Crude Oil Total Return Index ETN (OILX): -84.26%.

7. X-Links Crude Oil Shares Covered Call ETN (USOI): -78.39%.

8. United States 3x Short Oil Fund (USOD): -76.42%.

9. United States Oil Fund (USO): -75.46%.

10. ProShares K-1 Free Crude Oil Strategy ETF (OILK): -71.42%.

11. SPDR S&P Oil & Gas Equipment & Services ETF (XES): -62.16%.

12. iShares U.S. Oil Equipment & Services ETF (IEZ): -59.34%.

13. VanEck Vectors Oil Services ETF (OIH): -56.86%.

14. Invesco Dynamic Oil & Gas Services ETF (PXJ): -56.71%.

15. United States Brent Oil Fund (BNO): -55.25%.

16. iPath Pure Beta Crude Oil ETN (OLEM): -45.52%.

17. SPDR S&P Oil & Gas Exploration & Production ETF (XOP): -43.98%.

18. United States 12 Month Oil Fund (USL): -43.67%.

19. Invesco Dynamic Energy Exploration & Production ETF (PXE): -41.75%.

20. Invesco DB Oil Fund (DBO): -41.42%.

For example, ProShares Ultra Bloomberg Crude Oil (UCO), as of May 20, has a year-to-date return of -95%: It opened the 2020 calendar year trading above $500-per-share and presently sits at around $22.

As this list indicates, complex products that also incorporate leverage (e.g., the 3x leveraged ETPs including #1 worst-performing OILU [-99%] or #2 UWT [-98.85%]) are at increased risk of investor damage.

It's not just monetary losses, wrote FINRA, as ETPs such as USO changed their structures—for instance, including more contracts and early liquidations—while surging investor demand in the wake of these ETP collapses (e.g., investors looking to buy at a low price) exhausted available shares that the ETP's existing registration statement would allow to be issued, meaning that some customers trying to buy low ended up purchasing ETPs at a price higher than initially thought.

As such, FINRA reminded firms of their sales practice obligations, such as ensuring a reasonable basis to recommend the transaction based on the customer's investment profile or risk tolerance.

FINRA concluded its remarks by specifically stating of oil-linked ETPs, "it likely would not be suitable for a less experienced customer or a customer with a more conservative or a buy-and-hold investment objective."

FINRA's warning applies in the COVID-19 world just as it would in the pre-pandemic market, when ETPs still carried great risk, even as the markets climbed.

If you have invested with a firm, broker, or investment adviser who unsuitably recommended you invest in an oil-linked ETP such as US Oil Fund and such a transaction has proven harmful to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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