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Leveraged Oil Lottery Ticket Keeps Pulling in Assets

December 13, 2015 3:30 pm
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Things are getting worse for oil and oil-related exchange traded products. To this point in Friday's trading session, nearly 60 exchange traded products have hit all-time lows. Of that group, 27 are commodities products, and that does not include a number of currency, fixed income and international ETFs with significant exposure to commodity-producing countries.


And of that group of 27, a third are dedicated oil ETFs and exchange traded notes (ETNs). The United States Oil Fund (NYSE: USO), which tracks front-month West Texas Intermediate futures is one of the oil ETFs in Friday's all-time low club. Down 2.5 percent today (at this writing), USO is extending its year-to-date loss to 45.5 percent.


Yet in the epitome of a good money going after bad trade, USO has seen fourth-quarter inflows of over $1.2 billion. With money managers and other professionals barely willing to nibble at oil from the long side, there is little in the way of institutional support for energy stocks and ETFs. That and the Organization of Petroleum Exporting Countries (OPEC) stubbornly refuses to cut production to prop up prices. 


Knowing all that, it might appear that a long trade in the VelocityShares Daily 3x Long Crude ETN (NYSE: UWTI) would be akin to a kamikaze mission, but it is a mission plenty of traders seem willing to sign-up for. UWTI, which tracks three times or 300% the daily performance of WTI crude, is one of the other oil ETNs in Friday's all-time low club.


UWTI has pulled in an impressive $>650 million just in the trailing one month period, making $1.6 billion in net inflows year to date in this ETF. The fund is very popular in daily trading given the high level of interest in Crude Oil daily movements via the futures market and of course the budding Crude Oil linked ETP market. UWTI debuted back in February of 2012 but has really started to make its mark in the greater 'Crude Oil' ETP category in 2015 given the continued unabated slide in spot prices, and the ETN is actually the second largest fund in the category now in terms of asset size behind whom else but USO,” said Street One Financial Vice President Paul Weisbruch in a note out today. 


This is how bad things are for UWTI. At this writing, the ETN is lower by more than seven percent on the trading and trading at a $4.16 handle. That is after UWTI was reverse split 1-for-10 90 days ago, meaning over that period, the ETN has slumped a staggering 59.6 percent. UWTI might have further to fall before its issuer announces a reverse split as it resided around $1.20 at the time of the previous reverse split announcement. 


As most investors and traders should of course understand by now in late 2015, daily levered products tend to under-perform over time in markets that are moving counter-trend longer term to their Bull or Bear bias. And Crude Oil happens to be an asset this year that has just had a tremendously difficult time in rallying even for a short while in any case in 2015,” adds Weisbruch.


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