The crescendo of concern surrounding ETFs continues to grow, and something must be done.

It’s rare that I open my email box these days and don’t find some rant from an investor about how they’ve been ripped off by this or that ETF. Usually, it involves one of the leveraged or inverse ETFs, which failed to provide the long-term returns the investor expected.

I usually point readers to our recent webinar on leveraged and inverse ETFs, and explain briefly how compounding works. I remind them that these products are by and large working as designed, and gently suggest that it is the investor’s responsibility to understand how the products work before buying them.

More recently, I’ve been getting an earful about commodity ETFs, particularly USO, the United States Oil Fund (NYSE Arca: USO). The concerns stem from a simple fact: While spot crude rose 49% year-to-date through June 1, USO was up just 13%. That 36% disconnect has a lot of people upset.

For these readers, I walk through the basics of contango and backwardation, and explain that crude oil futures are a different animal from spot crude. I point to a few basic primers on the difference between spot prices and futures prices, such as this one from HardAssetsInvestor.com.

Still, many of the readers think something nefarious is going on. Consider this post from “arizona" on our discussion boards:

“I bought both USO and USL near their lows and I'm quite frustrated at what sure seems like these products are not even close to mimicking the performance of the spot price of oil which, as of this morning, sits above $71/barrel.

I understand that these products track the price of futures and I've heard the whole contango story but it's my understanding that contango has unwound and these products are closer to their true price and are actually closer to backwardation now. Is this accurate?

I'd love to see a chart which overlays the spot price, the futures price and the prices of both USO and USL”

Well arizona, here you go. I’ve only used USO and not USL so that we could have the longest possible data range, going back to August 2006.

The red line is USO. The green line represents the S&P GSCI Crude Oil Total Return Index, a simple rolling position in crude oil futures. The blue line is spot oil.

A glance at the chart will tell you everything you need to know. USO has tracked its benchmark very well, but has lagged crude oil dramatically. That’s particularly the case since December 2008, when a massive contango opened up in the oil markets and caused a huge deviation between USO and spot crude.

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