Know What You’re Buying

The recent news that Credit Suisse would be delisting two rather large ETNs, the VelocityShares 3x Inverse Crude Oil ETN (DWTI) and the VelocityShares 3x Long Crude Oil ETN (UWTI), seemed somewhat surprising. As of October 31, DWTI and UWTI had nearly $400 million and over $1 billion in assets, respectively. In fact, the DWTI delisting is the largest in history, beating out the $600 million PowerShares DB Crude Oil Double Long ETN (DXO) which closed in September 2009. Given the success in asset growth of these products, one might wonder why Credit Suisse would make such a move.

I’m sure they had several reasons, including looming potential regulatory problems, which we’ve written about previously. However, these ETNs (and many others) have more problems than future regulation. The real problem is that if they have any use, it is as a VERY short-term trading vehicle (and one could argue that short-term trading for most investors is a very bad idea). The below chart shows year-to-date performance for UWTI, DWTI and USO (an unleveraged oil ETF) through November 30, 2016. Whether you purchased the 3X long version or the 3X short version you are down between 43% and 71%. You lost no matter which way you bet!

Had you purchased an unlevered oil fund (USO) you would have been essentially flat for the year. I would argue that the typical investor doesn’t understand the return dynamics of these funds, and given their size, it seems that a lot of investors likely lost money in a product they failed to properly understand. The lesson? Even with seemingly straightforward products, investors still need to do their due diligence and understand exactly what they are purchasing.