Responding to a recent article on the massive inflows into oil exchange-traded products like the VelocityShares 3X Long Crude Oil ETN (UWTI) and the United States Oil Fund (USO | B-100), readers recently brought up some interesting questions. Most were concerning the viability of some of these products in light of their recent plunge.
Earlier this week, UWTI hit an all-time low of $0.71/share, while a similar product tied to natural gas, the VelocityShares 3X Long Natural Gas ETN (UGAZ) fell to $1.60/share.
One reader asked: "Can UWTI go bankrupt? I know it is issued by Credit Suisse and they have many other ETFs. I wonder if you can comment on bankruptcy potential and how likely it is."
To be precise, UWTI is an exchange-traded note (ETN) launched by VelocityShares, which was acquired by Janus last year.
Unlike exchange-traded funds, which effectively have no counterparty risk, exchange-traded notes such as UWTI do have that risk. ETNs are debt issued by a bank; in this case, Credit Suisse. So if that bank went belly up, UWTI would effectively go "bankrupt" as well. As unsecured creditors of the bank, holders of the ETN could potentially lose it all in that scenario.
This is what happened to three Lehman Brothers-issued ETNs in 2008, when that bank collapsed. However, that is the only instance of ETNs going under. ETN counterparty risk for Credit Suisse, which can be monitored on the ETF.com fund page for UWTI and other products, is currently low.
Importantly, the counterparty risk associated with an ETN like UWTI has to do with the health of the issuing bank, not the plunging price of oil.
Another reader asked a related question: "Is possible for [UWTI] to be liquidated by Credit Suisse?"
As an exchange-traded note, UWTI can be redeemed or delisted by the issuer at any time. However, because the ETN holds no assets, there would be nothing to liquidate. In the event of a redemption, holders would get paid back in cash. (In some cases, an issuer may opt to delist an ETN without redeeming the notes. In that case, the ETN would only trade over the counter, significantly reducing liquidity and making it difficult to trade out of.)
Fund-closure risk is something that all investors and traders in exchange-traded products have to consider.
One of the main indicators of whether an ETF or ETN is at risk of closure is its assets under management. A product with little in the way of assets isn't generating revenue for the issuing firm, and thus could be shuttered. There are other factors to consider when evaluating fund-closure risk, but suffice to say, for the highly popular UWTI, with its more than $900 million in assets, that risk is extremely low.