Curriculum·S212 TradFi Access Rails: ETFs, ETPs, and Treasuries·about 43 min
Futures-based and leveraged products
By the end of this lesson you can
- →Compute the annual cost of rolling a futures position in a contango market
- →Derive why a daily-reset leveraged product loses money on a flat underlying
- →Apply the drag formula to estimate a leveraged product's structural cost per year
- →State the holding periods these products are built for, and the ones they are not
Sophomore · enrolled learners
This lesson opens with United States Oil Fund, April 2020.
- What happened
- USO is an exchange-traded product that seeks for changes in its net asset value to track changes in the spot price of crude oil, as measured by changes in the price of a short-term oil futures contract. In April 2020 it received record daily inflows, including from a substantial number of retail investors, and on 21 April it exhausted its registered shares and suspended new creations. On 20 April 2020 the May 2020 WTI contract settled at negative $37.63 a barrel, a contract USO did not then hold. Beginning in mid-April, in response to market events, regulatory restrictions and limits from its broker, USO moved its holdings from the front month further down the curve into later months. On 22 April its sole futures commission merchant told it that it would not expand the clearing relationship through new creations, which the SEC describes as refusing to execute any new oil futures positions for USO. On 8 November 2021 USCF and USO settled with both the SEC and the CFTC, without admitting or denying the SEC's findings. The CFTC order found a failure, from about 22 April to 12 June 2020, to fully disclose to participants that the fund's only broker had imposed position limits that would render it unable to purchase additional futures contracts in connection with the future offering of new shares. The two agencies put the combined penalties at $2.5M.
- The decision point
- Investors bought a product whose stated objective was to track the price of oil, in a month when the oil market was in turmoil. What they held was a position in specific futures contracts, subject to the capacity of one broker and to exchange position limits, and the fund's ability to deploy new money was constrained by both. The SEC's order calls the result a risk of tracking error between the fund's objective and its net asset value. The objective was put at risk not by the oil price but by the plumbing, and the plumbing was not fully disclosed for about a month.
What you will be able to answer
- →What does a futures-based product actually track?
- →What does rolling in contango cost?
- →Why does a 2x daily product lose on a flat underlying?
- →What is the leveraged drag formula?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.sec.gov/files/litigation/admin/2021/33-11006.pdf
- https://www.sec.gov/newsroom/press-releases/2021-229
- https://www.cftc.gov/PressRoom/PressReleases/8457-21
- https://www.sec.gov/Archives/edgar/data/1327068/000110465920023944/uso-20191231x10k9feacd.htm
- https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/sec
- https://www.sec.gov/Archives/edgar/data/1053092/000095010318001572/dp86358_ex9901.htm
Confidence high·Volatility medium·Reviewed 2026-08-06·Owner unassigned
Contested
Contango is not universal and the roll is not always a cost. A market in backwardation pays the roller, and futures-based products gain from it. The lesson teaches the mechanism and its sign, not a claim that these products always lose.
The drag formula is a continuous-rebalancing approximation. Real products reset at discrete intervals and the realized drag differs, generally by less than the size of the effect being estimated. It is a sizing tool rather than a precise forecast.
The penalty arithmetic: the CFTC order imposed a $2.5M civil monetary penalty on USCF, and the SEC order imposed $2.5M on USCF and USO, offset by up to $1.25M paid in the CFTC matter. Both agencies describe the combined penalties as $2.5M. The findings are settled findings, made without admission or denial. The SEC order dates the misleading filings from 24 April to 21 May 2020; the CFTC order dates the disclosure failure from about 22 April to 12 June 2020.