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Energy ETFs Reverse Split To Survive | ETF.com

Energy ETFs Reverse Split To Survive

March 09, 2016

Credit Suisse announced this week that it will implement a reverse split on two exchange-traded notes that it is the counterparty for: the VelocityShares 3X Long Crude Oil ETN (UWTI) and the VelocityShares 3X Long Natural Gas ETN (UGAZ).

The reverse splits will go into effect at the market open on Monday, March 14. At that time, holders of UWTI will receive one share for every 10 they currently have, while holders of UGAZ will receive one share for every 25 they currently have.

Additionally, at the Monday open, the share prices of UWTI and UGAZ are expected to be 10 times and 25 times higher than their presplit levels.

The reverse splits will keep the two ETNs in compliance with NYSE exchange requirements that call for a minimum share price of $1.

Deja Vu

The latest move by Credit Suisse comes only six months after the last reverse split for these volatile ETNs, underscoring the perils of triple-leveraged commodity products. In September 2015, UWTI had a one for 10 reverse split and UGAZ had a one for five reverse split.

Sine that date, UWTI plunged 81%, while UGAZ lost 91%.

Even worse, since inception in 2012, both ETNs lost more than 99.5% of their value.

Popular Products

Despite the dismal performance, UWTI and UGAZ remain popular products for traders. On a volume basis, UWTI has been the most widely traded exchange-traded product of all during the past month (though that's a status it's likely to lose after shares become more expensive due to the one for 10 reverse split).

Hoping to catch a quick bounce in energy prices―such as the nearly 50% increase in crude oil prices during the past six weeks―these traders are using these ETNs to essentially gamble on oil and natural gas. If timed perfectly, the trade can pay off.

From its low on Feb. 11 to its recent high on Monday, UWTI jumped 115%.

But barring optimum timing―which most traders lack―these ETNs tend to deliver substantial, painful losses.

Education Important

Unaware of the drag on returns that comes from daily rebalancing, many traders are surprised and disappointed by the performance of these products. Likewise, many traders fail to understand the impact of contango on futures-based products.

That's why education is more important than ever when it comes to leveraged ETPs and nontraditional ETPs in general. Click here to read more about leveraged and inverse ETFs, and click here to read more about contango.


Contact Sumit Roy at sroy@etf.com.

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