The oil ETF trying to avoid imploding on retail investors attempts another trick with reverse split

The United States Oil Fund, a popular exchange-traded security known for its ‘USO’ ticker, announced another change to the fund’s makeup on Wednesday as it tries desperately to retain investors after a 77% drop this year.

USCF, the manager of the fund, said that it will execute a one-for-eight reverse share split for USO that will go into effect after the close on April 28.

A reverse stock split reduces the number of shares outstanding, but raises the price of the stock. This is a cosmetic change and the net effect to the return for existing shareholders will be nothing. None of the fund’s fundamentals are altered.

After opening in the green, shares fell more than 5% to $2.68.

The fund, which is popular with retail investors, seeks to track the price of oil. USO has sustained heavy losses as the price of crude falls. Starting on Friday, USCF began implementing a number of changes to the fund’s structure in an effort to stave off additional losses.

On Tuesday USCF said that going forward the fund would hold longer-term West Texas Intermediate contracts instead of just focusing on the front month contract.

USCF also said that it was temporarily suspending the issuance of so-called creation baskets. Creation baskets are how an ETF creates new shares to meet demand. The baskets hold the underlying securities, which in this case are plummeting oil futures. With the halting of these creation baskets, the ETF will essentially now trade with a fixed number of shares like a closed-end mutual fund.

When asked why the fund keeps changing its structure, USCF chief marketing officer Katie Rooney told CNBC the following: “Due to extraordinary market conditions in the crude oil markets, including super contango, USO has invested in other permitted investments, as described in the prospectus.”

Hayman Capital Management CIO Kyle Bass, who has been a vocal critic of commodity-focused ETFs geared toward retail investors, called the reverse split “garbage” in a tweet. Bass also has a short position in in some of these ETFs.

Warren Pies, energy strategist at Ned Davis Research, sounded a similarly cautious tone.

“At best, they are expensive ways to gain programmatic futures exposure,” he said of commodity-based ETFs on Monday. “At worst, they are designed to implode. Still, money continues to flow into the USO ETF. As of last week, USO’s assets reached an all-time high of more than $5 billion. To reiterate: In this environment, USO is a train wreck. Stay away,” he said.

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