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ETFs at Risk as Oil Slides to 13-Month Low on Covid-19 Scares

Sweta Jaiswal, FRM

The coronavirus epidemic is spreading rapidly worldwide, with the death toll rising to 2,808 globally, along with 82,419 confirmed cases. Moreover, the surge in the number of infected cases outside mainland China has made the outbreak a serious threat to global economic growth. Growing concerns that the outbreak will dent demand have led to a slump in oil prices. The West Texas Intermediate futures for April delivery decreased 2.3% on Feb 26, to close at its lowest level since Jan 7, 2019. In fact, there has already been a slump of about 20% in oil prices so far in 2020.

Covid-19 and Global Economy

The Centers for Disease Control and Prevention recently reported the first coronavirus case in the United States. Fresh Covid-19 cases have been reported in Pakistan and Brazil as well. Meanwhile, Germany (one of the world’s top 12 economies) that is already close to slipping into recession has announced that it is at the “beginning of a coronavirus epidemic” (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).

Moreover, South Korea is grappling with rising Covid-19 cases, which has now reached 1,595. Meanwhile, Italy, already struggling with a weak economy, has witnessed a spike in the infected cases to 470. The Covid-19 cases in Iran have also soared to 141. Given China’s dominance in the world economy, it is believed that global supply chains have already been hit hard. Analysts assume that decline in China’s domestic consumption levels will adversely impact the companies acting as transport groups, hospitality chains, airlines, luxury goods makers and retailers. The petrochemical producers based in Asia are feeling the brunt of the aggravating virus outbreak. They have to grapple with increasing stockpiles and diminishing profits due to falling demand.  

Goldman Sachs recently trimmed the U.S. economic growth forecast for the first quarter of 2020 to 1.2% from 1.4% due to mounting coronavirus concerns. The current GDP projections compare unfavorably with the 2.1% rise in economic growth in the fourth quarter of 2019 and 2.3% rise in 2019.

Notably, analysts at Oxford Economics project that the coronavirus outbreak globally can disrupt the GDP by 1.3% or $1.1 trillion in lost output, if it turns into a pandemic (read: Is it the Right Time to Buy Global Low-Volatility ETFs?).

Oil ETFs That can Lose

All investors’ hopes are now dependent on the Organization for Petroleum Exporting Countries and its allies meeting in Vienna next week. Deeper output cuts can still provide some support to the sliding oil prices. Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).

United States Oil Fund USO — down 20.5% year to date

The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: Sector ETFs at the Midpoint in Q1: Hits & Misses).

AUM: $1.44 billion

Expense Ratio: 0.73%

Invesco DB Oil Fund DBO — down 19.9%

The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).

AUM: $249.8 million

Expense Ratio: 0.78%

United States Brent Oil Fund BNO — down 18.1%

The fund tracks the daily price movement of Brent crude oil (read: Minimal Damage Expected From Covid-19? ETF Areas to Benefit).

AUM: $78.4 million

Expense Ratio: 0.90%

U.S. Commodity Funds United States 12-Month Oil USL — down 16%

The fund replicates with possible accuracy the movement of West Texas Intermediate light, sweet crude oil.

AUM: $43.5 million

Expense Ratio: 0.82%

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Invesco DB Oil ETF (DBO): ETF Research Reports
 
United States 12 Month Oil ETF (USL): ETF Research Reports
 
United States Oil ETF (USO): ETF Research Reports
 
United States Brent Oil ETF (BNO): ETF Research Reports
 
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