VelocityShares Credit Suisse 3X Long Crude ETN (UWTIF)

[Smittle]

Mom’s Big Oil Bet Bites the Dust

Demise of two popular ETNs shows risks of such investments

By Spencer Jakab
•
November 28, 2016

A popular exchange-traded note, with the ticker symbol UWTI, turned over half of its shares on typical trading days. In dollar terms last Monday that was as much as Exxon Mobil, the world’s largest listed oil company. An Exxon oil platform Photo: ExxonMobil

One of the stock market’s most popular investments--a favorite of “moms and millennials”--is being delisted with an offer of early redemption, showing once again why complicated structured products that promise high returns are best avoided.

With the explosion in the number of exchange-traded products, inevitable closures have followed. Some fill no real investor need—whiskey, Mongolia or Nashville, for example. Others just didn’t trade enough.

That wasn’t the issue for two hugely popular exchange-traded notes by VelocityShares that give investors triple daily exposure to gains or losses in a crude-oil index. The larger of the two, with the ticker symbol UWTI, turned over an astounding half of its shares on typical trading days. In dollar terms last Monday that was as much as Exxon Mobil, the world’s largest listed oil company.

But sponsor Credit Suisse will delist both ETNs from the New York Stock Exchange Arca market on Dec. 9 and cease issuing new units. To understand why, consider the difference between ETNs and more numerous exchange-traded funds, or ETFs. An ETN is an unsecured loan to a bank that provides exposure to a specific asset. If you buy and hold the ETN—and no one does—the bank promises to pay you on a specified maturity date— 2032 in the case of UWTI and DWTI—unless it “accelerates” redemption.

There are multiple problems with products like this. In 2012, Credit Suisse suspended issuance of an ETN that was supposed to produce twice the return of VIX volatility futures. Prices rose to a premium over the notional value of the shares, prompting short sellers to step in on what seemed like a sure bet that the premium would be wiped out. But prices kept rising and forcing short sellers to scramble to buy shares. Prices soared to 90% above their notional value and then collapsed in a matter of days.

Even without such dislocations, a leveraged ETN can be an awful investment. While crude oil has lost around half of its value since February 2012, UWTI is down a whopping 99.6%, undergoing multiple reverse splits to avoid becoming a penny stock.

At least a slow 99.6% loss is better than a quick 100% in event of bankruptcy. Owners of Lehman Brothers ETNs had to get in line with the bank’s other unsecured creditors.

So why is Credit Suisse pulling the plug on cheap money it doesn’t have to repay for 16 years? Probably because, from a regulatory perspective, it isn’t so cheap, especially for a bank that is trying to boost its capital. The bank’s hedges, volatile oil derivatives, count toward its risk-weighted assets.

But at least Credit Suisse is repaying the money quickly, which it isn’t required to do. When it delisted some ETNs in 2009, the bank dragged its feet repaying the cash. Regardless, steer clear of this “going out of business sale.”

Corrections & Amplifications:
Exchange-Trade Notes sponsored by Credit Suisse are being delisted and shareholders are being offered early redemption on the notes. A Heard on the Street column on Monday said the ETNs are being shut down. Some of the notes may continue to trade over the counter. (Nov. 29)

—Spencer Jakab

Write to Spencer Jakab at [e-mail]

http://www.wsj.com/articles/moms-big-oil-bet-bites-the-dust-1480362446