Oil ETFs let you trade crude through an ordinary brokerage account, but most of them do not hold oil. They hold futures contracts — and that one fact explains why their long-term returns can be very different from the WTI price you see on a chart. This guide explains how the main oil funds work, the cost of contango, and how they differ from energy-stock ETFs.
Three Kinds of Oil Funds
- Futures-based crude funds hold oil futures and roll them before expiry. Examples: USO (United States Oil Fund, WTI futures), BNO (United States Brent Oil Fund, Brent futures), USL (WTI futures spread across 12 months), DBO (Invesco DB Oil Fund, WTI futures with a roll rule that seeks to reduce contango costs) and OILK (ProShares K-1 Free Crude Oil Strategy ETF).
- Leveraged and inverse funds such as UCO and SCO aim for a multiple (2x or −2x) of the daily move in an oil futures index. Because they reset daily, their returns over longer periods can differ sharply from 2x the oil move, especially in volatile markets.
- Energy-equity ETFs such as XLE (large US energy companies), XOP (equal-weighted exploration and production stocks) and OIH (oil services) hold shares, not futures. They are linked to oil prices through company profits but also move with the stock market. See oil stocks vs oil prices.
Fund details such as holdings, fees and tax reporting change over time; always check the issuer's prospectus. Several commodity-pool funds issue a Schedule K-1 for US taxes rather than a Form 1099.
How Futures Rolling Works
A WTI futures contract expires each month (see the contract specifications). A fund that wants continuous exposure has to sell the contract it holds before expiry and buy a later one. If the later contract is more expensive (contango), the fund buys fewer barrels each roll, and over time it loses ground versus the spot price. If the later contract is cheaper (backwardation), it gains. Oil markets are usually in contango when inventories are high and in backwardation when supply is tight — as during the 2022 and 2026 supply shocks.
The 2020 Lesson
In April 2020, with storage at Cushing nearly full, the expiring May WTI futures contract settled at minus $37.63 a barrel. USO, then one of the largest holders of front-month WTI futures, had to change its strategy to hold contracts further out, and it carried out a 1-for-8 reverse share split. Investors who bought USO expecting to profit from a rebound in oil prices found that the fund's losses from rolling through extreme contango were not recovered when spot prices rose.
Choosing Between WTI and Brent Exposure
USO and BNO usually move together, but they diverge when the WTI-Brent spread moves. In March–April 2026 the Strait of Hormuz crisis hit seaborne Brent harder than inland WTI, and the monthly average spot spread widened to about $17 in April, so Brent-linked funds rose more than WTI-linked funds during that period.
Practical Points
- Compare the fund's performance with the spot price over a full year, not just a week.
- Check the shape of the futures curve: steep contango is a headwind for futures-based funds.
- Leveraged funds are designed for short holding periods.
- You can watch USO and BNO next to WTI and Brent on our homepage ETF charts.
Frequently Asked Questions
Does USO track the WTI price?
Not exactly. USO holds WTI futures contracts, not physical oil, so its return equals the change in futures prices plus or minus the cost of rolling expiring contracts, minus fees. Over days it follows WTI closely; over months and years it can drift far from the spot price, especially when the futures curve is in contango.
What is contango and why does it hurt oil ETFs?
Contango is when later-dated futures cost more than the nearby contract. A fund that keeps selling the expiring contract and buying the next one is repeatedly selling low and buying high, which drags on returns even if the spot price is unchanged. Backwardation, the opposite shape, adds to returns.
What is the difference between USO and BNO?
USO holds WTI (NYMEX) crude futures and BNO holds Brent (ICE) futures. Their returns differ by the change in the WTI-Brent spread and by the different shapes of the two futures curves.
Are oil ETFs good long-term investments?
Futures-based oil funds are generally designed as trading or hedging tools. Because of roll costs and the absence of any yield, they have historically performed poorly as buy-and-hold investments compared with the spot price. Energy-stock ETFs such as XLE behave differently because they own companies that pay dividends.
Sources
- USCF — United States Oil Fund (USO) fund page
- USCF — United States Brent Oil Fund (BNO) fund page
- SEC Investor.gov — Commodities
- CME Group — WTI crude oil futures
- EIA — Cushing, OK WTI spot price
Disclaimer: This article is for general information only and is not investment advice. Trading oil, futures and energy securities involves substantial risk of loss.