The past two years have seen record volatility in oil prices, opening up opportunities for investors with a high appetite for risk.
Several exchange-traded notes (ETNs) and exchange-traded funds (ETFs) that track crude oil prices have become extraordinarily popular, particularly among younger investors that can stomach the daily whiplash from sharp movements in oil prices. Bloomberg reports that the VelocityShares 3X Long Crude ETN, which trades up or down three times as much as the daily move of oil prices, has become the fifth most traded security by investors aged between 18 and 34.
VelocityShares 3X Long Crude, which trades under the ticker UWTI, is not for the faint of heart. If WTI increases 2 percent, UWTI shoots up around 6 percent. It was not uncommon earlier this year when oil prices were crashing to see UWTI lose double-digit percentages in a single day. That was a good time to be in DWTI – or VelocityShares 3X Inverse Crude ETN – which is essentially the mirror image of UWTI. DWTI trades at three times the daily movement of crude, but inversely. If oil goes up 3 percent, DWTI goes down 9 percent. If oil goes down 3 percent, DWTI goes up 9 percent. In January 2016 alone, when oil prices plunged to $26 per barrel, DWTI saw its entire value more than double.
The extreme volatility in oil prices over the past two years has attracted a type of investor that is looking for some excitement. The oil market has been "like a roller coaster,” one 26-year-old Toronto-based man told Bloomberg in an interview. “Ultimately, that’s why I’m trading this position. It’s been pretty volatile lately, with these huge swings. It’s kind of fun.”
But ETNs like UWTI and DWTI reset at the end of each trading day, and are not intended to hold for long periods of time. In fact, the prospectus says that the ETN “may not be suitable for investors who plan to hold them for a period other than one day. They are designed to achieve their stated investment objectives on a daily basis, but their performance over different periods of time can differ significantly from their stated daily objectives.”
“It’s almost like going to the craps table and saying, ‘I’m going to put it on the black or I’m going to put it on the red,”’ David Fabian, managing partner at FMD Capital Management, told Bloomberg. “It has more to do with a gambling and trading mentality than a true investing mentality.”
But that is exactly why so many young investors are trading them.
By Charles Kennedy of Oilprice.com
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