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Filling The Gap: Tomorrow’s Most Popular Oil Trade

Wall Street traders

Credit Suisse AG recently decided to delist two very popular and risky oil exchange-traded notes (ETNs) on the exchanges beginning today, December 8, and companies are now scrambling to fill the void with suitable replacement products for risk-hungry traders.

The ETNs that have been delisted are the VelocityShares 3x Inverse Crude Oil ETN (DWTI) and the VelocityShares 3x Long Crude Oil ETN (UWTI). The reason for delisting the ETN, according to Michael Iachini, managing director of mutual fund and exchange traded fund (ETF) research at Charles Schwab Investment Advisory Inc., is that "The benefits of ETNs, in most segments of the market, are not that great. It's not a great loss."

But millennials, who seem to flock to the risky ETNs, may feel otherwise, despite the inherent risks, which the Bloomberg chart below shows. So what do these traders do now?

Filling the Void

Products with large leverage, such as the scrapped ETNs, will always be in demand, especially from the day traders and swing traders who want to capture the momentum in the crude markets.

U.S. Commodity Funds, the company that owns the U.S. Oil Fund ETF (USO) has filed preliminary prospectus on November 29 to launch a triple-leveraged oil exchange-traded fund, in hopes of capturing some of the market void.

Similarly, Proshare Advisors, which owns the ProShares Ultra Bloomberg Crude Oil (UCO), the largest competitor to UWTI, has also announced its plans to launch a triple-leveraged ETF, according to the Wall Street Journal.

While new ETFs are in the works, ProShare’s existing oil future ETFs have seen increased acivity since it was announced that Credit Suisse was pulling its ETN, according to WSJ—an oil future ETF that has double exposure to oil prices. Related: Boasting About Oil Exports, Iran Says OPEC Needs Cooperation To Boost Prices

ETNs are a risky venture indeed. While crude oil has dropped 50 percent from its 2014 level, the Velocity Shares ETN is down 98.8 percent during the same period. Last year, UWTI was among the most popular securities traded by millennials, according to TD Ameritrade Inc, a retail-focused broker. Institutional activity for the ETN, on the other hand, is low at only 16 percent.

 

(Click to enlarge)

What is an ETN and why is it risky?

An ETN is a senior, unsecured, unsubordinated debt security issued by an underwriting bank, having a maturity date but with no period coupon payments distributed and no principal protections. They are backed only by the credit rating of the issuer.

Though the ETNs track the performance of the market benchmark index, unlike ETFs and index funds, they don’t own anything they track, as they are debt securities. Related: U.S. Shale Set To Kill Oil Price Rally

The owner of the ETN can either sell it on the exchange or redeem it by directly issuing it to the bank if he owns a large block.

Why is Credit Suisse delisting popular ETNs?

Both the ETNs were popular. At one point, UWTI had over $1 billion in assets.

As of December 08, UWTI has a market capitalization of $617.2 million and a 20-day average volume of 24,941,888. DWTI has a market capitalization of $210 million and the 20-day average volume is 3,847,640.

Both these ETNs will be unavailable for trading on any national securities exchange, however, they will remain outstanding and will trade on an over-the-counter basis only. Because of this, it is wise for a regular investor to sell their ETNs, as the ETN may not fetch the value of the underlying security, considering the low liquidity of over-the-counter trades.

Though many investors are hoping that Credit Suisse will announce a plan to redeem the ETNs for cash, the bank has not committed to this so far.

Credit Suisse had said that it is delisting the ETNs to better align “its product suite with its broader strategic growth plans.”

Bye-bye UWTI and DWTI.

By Rakesh Upadhyay for Oilprice.com

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