Leveraged & Inverse ETN Extinction

July 10, 2020

In the ETF industry, an extinction is quietly taking place.

So far this year, 173 exchange-traded products have shut down, delisted, been closed to creations or otherwise become unavailable to investors.

That in itself is a remarkable number—last year, only 126 ETFs shut down—but the sheer volume of closures conceals something else remarkable: 50 ETNs have shut up shop so far in 2020, and almost all of them are leveraged or inverse.

So far this year, 38 leveraged and/or inverse ETNs have been called, redeemed, closed to creations or expired, or their imminent closure has been announced. That's three-fourths of all ETN closures, and one-fifth of all exchange-traded products so far to close in 2020, period.


Leveraged & Inverse ETNs Closed So Far In 2020
Ticker Fund Creation Halt Last Day of Trading Delisting Called Automatic Acceleration Upon Hitting $0/Share Mandatory Redemption
AMJL Credit Suisse X-Links Monthly Pay 2xLeveraged Alerian MLP Index ETN   3/9   3/18    
BDCL ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN       4/1    
CEFL ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN       3/26   3/19
CEFZ ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN Series B       3/26   3/19
DGAZ VelocityShares 3X Inverse Natural Gas ETN 6/22 7/10 7/12      
DGLD VelocityShares 3X Inverse Gold ETN 7/2 7/2 7/12      
DLBR VelocityShares Short LIBOR ETN 4/7     4/16    
DLBS iPath US Treasury Long Bond Bear ETN 3/2 3/9 3/9      
DRR Market Vectors-Double Short Euro ETN     4/29      
DSLV VelocityShares 3X Inverse Silver ETN 7/2 7/2 7/12      
DTO DB Crude Oil Double Short ETN   5/18     5/19  
DTYS iPath US Treasury 10-year Bear ETN 3/2 3/9 3/9      
DVHL ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN       3/25   3/18
DVYL ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN       4/1   3/24
DWT VelocityShares 3x Inverse Crude Oil ETN 3/20 4/2        
EVIX VelocityShares 1X Long VSTOXX Futures ETN       4/8    
EXIV VelocityShares 1X Daily Inverse VSTOXX Futures ETN 3/25     4/8    
HDLV ETRACS Monthly Pay 2xLeveraged U.S. High Dividend Low Volatility ETN       3/24    
HOML ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN       3/20    
LBDC ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN Series B       4/1    
LMLP ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN       3/24    
LRET ETRACS Monthly Pay 2xLeveraged MSCI US REIT INDEX ETN       3/26   3/19
MLPQ ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Index ETN Series B       3/18    
MLPZ ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B       3/23    
MORL ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN       3/24    
MRRL ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN Series B       3/24    
SMHD ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN       3/20    
TAPR Barclays Inverse US Treasury Composite ETN 3/2          
TVIX VelocityShares Daily 2x VIX Short-Term ETN 7/2 7/2 7/12      
UGAZ VelocityShares 3X Long Natural Gas ETN 6/22 7/10 7/12      
UGLD VelocityShares 3X Long Gold ETN 7/2 7/2 7/12      
URR Market Vectors-Double Long Euro ETN     4/29      
USLV USLV - VelocityShares 3X Long Silver ETN 7/2 7/2 7/12      
UWT VelocityShares 3x Long Crude Oil ETN 3/20 4/2        
VIIX VelocityShares Daily Long VIX Short-Term ETN 7/2 7/2 7/12      
WTID ETRACS ProShares Daily 3x Inverse Crude ETN       3/25    
WTIU  UBS ETRACS - ProShares Daily 3x Long Crude ETN 3/24     4/8    
ZIV VelocityShares Daily Inverse VIX Medium-Term ETN 7/2 7/2 7/12      

Source: FactSet; data as of July 7, 2020


In contrast, only 15 leveraged and/or inverse ETFs have shut down this year, out of a total 123 ETFs to kick the bucket.

What makes leveraged/inverse ETNs so uniquely exposed to closure risk? And what does 2020's bloodbath bode for the 55 leveraged/inverse ETNs still on the market?

Proportionally More Leveraged ETNs Than ETFs
The answer to the first question is: It's complicated.

First, there's something of a selection effect at work here: Leveraged/inverse ETNs are more likely to shut down simply because ETNs are more likely to offer leveraged and inverse exposure. Roughly 45% of ETNs offer some kind of leveraged/inverse exposure—compared to just 8% of ETFs.

That's because leveraged and inverse exposure is often easier to achieve in the ETN vehicle—which is just a debt instrument whose return is tied to the return of a given index—than in an ETF.

An ETN holds no securities; any return it offers, leveraged or not, is simply an index calculation. An ETF, however, must own physical securities, meaning the portfolio manager must dip into the derivatives market to achieve leveraged and inverse exposure.

Why 2020 Has Been Hard For Leverage
In addition, we've seen persistently high market volatility this year. That's good for bargain-hunters but challenging for leveraged and inverse products, whose massive price swings under such conditions don't always match investors' expectations.

As a reminder, leveraged and inverse funds offer exposure not to some multiplier of the total return of their underlying indexes, but rather to a multiplier of the daily return of their underlying indexes. (Read: "Don't Buy & Hold Leveraged ETFs.")

As a result, any disparities between benchmark and ETP price can and often do quickly compound in highly volatile markets, where prices whipsaw up and down over the course of days. (Of course, leveraged and inverse funds can go haywire even in sideways, low volatility markets, too.)

Most leveraged/inverse ETNs have fail-safe clauses in their prospectuses to prevent their share prices from going negative. If the price of that note falls too quickly, or passes some minimum price threshold, then the ETF automatically “accelerates” (meaning, its redemption date is moved up and the note shuts down).

Due to 2020's high market volatility, many leveraged/inverse ETNs hit those thresholds and were mandatorily redeemed. Still others came too close for the issuers' comfort and were shut down before they could get the chance to trigger the fail-safes.

As a result, many ETNs closed that weren't intended to be redeemed for another two decades or more. (Read: "Leveraged ETF Closures Piling Up.")

Delisting: Still The Worst Possible Outcome
As surprising as a mandatory redemption can be, it's actually a form of investor protection; investors can rest assured that they will receive some—though by no means all—of their investment back on the redemption date.

That's not the case for delisted ETNs. Delisting usually occurs when an ETN falls below the minimum indicative value required by an exchange—which has happened to several leveraged and inverse products this year, particularly in those with energy and bearish precious metals exposure, for obvious reasons.

When a product is delisted, it is taken off its exchange; no more trades may be executed in it, except in over-the-counter (OTC) markets.

The ETN doesn't close, however. Instead, investors who do not exit the note before its delisting date are stuck with positions that are extremely difficult and expensive to liquidate, especially for retail investors lacking easy access to OTC trading.

Several leveraged/inverse ETNs have delisted so far in 2020, including the iPath US Treasury Long Bond Bear ETN (DLBS) and the iPath US Treasury 10-Year Bear ETN (DTYS), whose indicative values had fallen below their exchange's minimum required share price.

That said, an issuer may decide to delist its products on its own discretion or on the discretion of the bank backing the note—as was the case for VelocityShares, which recently announced the delisting of several leveraged and inverse ETNs.

The most high profile of these was the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), which had $1.4 billion in assets under management as of the time of the announcement. (Read: "Popular ETNs Delisting In July.")

An issuer choosing to delist its own notes instead of redeeming them for investors is highly unusual, however, and very rare.

What Happens Next?
There are 122 ETNs left on the market, 55 of which (or 45%) are leveraged and inverse—many of them offering the same industry or sector coverage as the products that shuttered earlier this year. What will become of them?

Unfortunately, their days may be numbered. And that's not necessarily because the ETN structure is losing popularity, but because leveraged products are less popular than ever.

The percentage of the total ETF market that leveraged ETPs represent has steadily declined over the past 10 years, falling from 1.3% of total ETP assets in 2010 to just 0.68% in 2020.

Same for inverse products, which fell from a 2.1% market share 10 years ago to just 0.51% invested today. (Read: "Leveraged & Inverse ETF 'Mirage.'")

That's likely because institutional hedgers and active ETF traders—the main user base for leveraged/inverse products—have become a smaller portion of the ETF market. The slack has been taken up by retail investors, who, despite all the ink spilled about Robinhood traders, are by and large staying away from leveraged/inverse products.

Leveraged and inverse ETNs are niche products, and they're only getting niche-ier—if they even survive 2020 at all.

Contact Lara Crigger at [email protected]

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