USO ETF Needs to Change Charter, Jim Cramer Says

Jim Cramer weighs in on the USO ETF.
Publish date:

Let's talk about oil. 

Specifically, let's go over what's happening with the United States Oil ETF (USO).

Luckily, TheStreet's ETF Focus has taken a look at the woes impacting USO and David Dierking broke it down. 

Here's what Dierking wrote:

For starters, USO, which invests in forward oil futures contracts, is down 78% year-to-date. While the fund's price has been cratering, investors and speculators have moved in adding $3 billion to the fund's total asset base in about a month and a half. USO was recently at just $1 billion, so the fund has quadrupled in size. This has put a lot of strain on the fund to operate effectively.

USO only has a fixed number of shares available to buyers. That wasn't a problem before, but now that money has poured in, all of those shares got snapped up. The fund hit its max earlier today and was forced to announce that it is halting all new share creations until the SEC is able to step in and approve a new issuance.

The ETF industry's share creation/destruction mechanism helps ensure that the fund almost always trades at or very near its underlying NAV. Now that this mechanism effectively no longer exists, USO essentially has begun trading like a closed-end fund, a portfolio that only has a fixed number of shares and trades based on supply and demand. Like CEFs, USO has begun disconnecting from its underlying NAV and now trades at a massive 20%+ premium.

So, what does Jim Cramer think?

Watch the full video above for Cramer's full take.

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