Investing Blog

Just a few days ago I posted here regarding the systematic explosion of cash in the ETF industry. I wondered that as more and more people piled money into exchange-traded funds that the trackers could eventually lead. That the ETF would set the price rather than the index or commodity market, essentially stealing the market from the original and bringing it to the stock market.

Now word has been released that the USO Oil Fund, which now houses more than 18% of all NYMEX front month futures, will change its operations to rollover its positions over four days of each month. Previously the ETF had simply done the flip on one day but when 18% of all volume for the day gets sold at one time, prices swing violently.

This ETF is massive, it started with just $7 million and has since grown to encompass more than $3.8 Billion worth of oil and that is only set to go up as oil prices rebound.

Should oil move to $75 again on speculative demand I would first look to USO as the main culprit. At a reasonably small valuation of $3.8 Billion it represents 18% of all contracts. With time I could easily see where the oil fund moves to hold every contract on the NYMEX, if not even more on the foreign markets.

I can’t wait to see how the ETF industry really develops, in a few short years they’ve grown to 38% of Wall Street’s volume by dollars and number at 843. This time next year that will probably be something like 1500 ETFs with 50% of all stock market volume. I really hope not.

Investing