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Be Careful With This Oil ETF In May

ETF Professor

May is here and with the arrival of the fifth month come the requisite musings about selling in May and going away. Broadly speaking, selling in May and going doesn't work every year, but some exchange traded funds do have histories of struggling in May and into the third quarter.

What Happened

Among ETF candidates for some May showers are energy funds, both alternative and traditional. With oil ranking as one of this year's best-performing commodities, the Invesco DB Oil Fund (NYSE: DBO) is up 28.57 percent.

However, May's arrival brings a potentially taxing seasonal stretch for DBO and crude oil.

Why It's Important

DBO tracks the DBIQ Optimum Yield Crude Oil Index Excess Return Index, making it an index-based, not a futures-driven strategy. The primary exposure in DBO is West Texas Intermediate (WTI) crude, the U.S. oil benchmark. Not only does the energy sector's best seasonal period end with the start of May, the May through September period is historically weak for oil itself.

Regarding DBO's historical seasonality, the January through April period is by far the best time of year to be involved with this oil fund.

“Drilling down on a month-by-month basis over the past decade, DBO averages a negative return in each of the last eight months of the year -- notably, a streak that includes the May-through-September gauntlet,” according to Schaeffer's Investment Research. “What's more, May and September have the lowest percentage of positive returns among all months, at 40%, while July and May tend to hit DBO with its third and fourth steepest average monthly declines of the year.”

What's Next

As for what is next for DBO, not much good if seasonal trends hold true to form. Over the past decade, only one U.S.-listed ETF has performed worse than DBO from Memorial Day through Labor Day.

Of the 10 worst-performing ETFs during the Memorial Day through Labor Day period, including DBO, four are oil-related ETFs or funds with significant exposure to fossil fuels. Some traders may be preparing for DBO to live down to its season weakness as $4.47 million has been pulled from the fund over the past month.

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