Investors like having the flexibility to track just about any benchmark they want. The rise of the $5 trillion exchange-traded fund industry has made it dramatically easier for investors seeking exposure in just about any corner of the market to get it.

But what many investors find out the hard way is that not every fund tracks an underlying investment the way they expect. For investors in United States Oil Fund (NYSEMKT:USO) on Monday, that actually turned out somewhat better than shareholders might have expected. Yet with news of oil prices going negative on Monday, the question many are asking is why U.S. Oil Fund's shares didn't follow suit.

What U.S. Oil Fund aims to give investors

The creators of the United States Oil Fund designed the exchange-traded security to track the daily price movements of West Texas intermediate (WTI) light sweet crude. Specifically, the investment objective of the fund is to reflect daily changes in percentage terms of the spot price of crude delivered to the energy hub in Cushing, Oklahoma.

Drilling rig with pipe and two workers.

Image source: Getty Images.

However, the way that U.S. Oil Fund goes about doing that is slightly more complicated. Rather than actually owning spot oil and storing it, the fund instead uses oil futures contracts to try to approximate movements in the spot oil market. As long as futures prices remain somewhat aligned to those of the underlying spot market in crude oil, then U.S. Oil Fund's performance on a day-to-day basis typically has similar movements to those of the spot commodity.

The futures that U.S. Oil Fund invests in

Some investors might have expected U.S. Oil Fund's shares to get completely wiped out on Monday. News that May WTI crude futures had gone into negative territory suggested the same sort of outcome that ETFs tied to volatility levels suffered in early 2018, with one fund taking a catastrophic hit that caused it to shut down entirely.

But U.S. Oil Fund didn't go negative, and the reason is that it had already gotten out of those May futures. According to its schedule, U.S. Oil Fund started rolling out of May contracts into June futures starting on April 7, with the intent of completing the move by April 13. As a result, by Monday, the fund no longer owned any May futures, having moved most of them to June.

In addition, U.S. Oil Fund recently changed its investment guidelines. The size of the fund had created problems in complying with regulatory restrictions limiting the number of futures contracts that any one party can have open at a given time. As a result, the fund diversified about 20% of its exposure to the futures contracts expiring two months out. Right now, therefore, the fund holds about 158,000 contracts for June crude oil and almost 34,000 contracts expiring in July.

What it would take for U.S. Oil Fund to go to zero

The way that United States Oil Fund tries to mimic spot price movements saved it from disaster on Monday, but it doesn't mean the fund is safe. Early Tuesday, prices of the June futures that U.S. Oil Fund has as the bulk of its crude position were down more than 30% to $14 per share, and shares of the fund itself dropped about 20% at the open just after 9:30 a.m. EDT.

If prices of June futures go negative before the fund's scheduled roll date between May 5 and May 8, then there's a chance that U.S. Oil Fund's shares could go to $0 as well. Much would depend on whether the fund's roughly 20% position in July futures managed to stay positive to offset the downward moves for June.

The big question facing the oil futures markets is whether oversupply will last so long that it causes contracts for June and July to see the same volatility that May contracts saw on Monday. If those supply-and-demand disparities persist and futures prices head toward negative levels, then energy investors who look to U.S. Oil Fund might face the loss of their entire investment.