Horizons Warns Investors To Avoid Two Of Its Oil ETFs

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Horizons ETFs Management Inc. is warning investors not to buy two of its popular oil-based exchange traded funds as ETFs could implode due to the collapse in energy prices.

The company’s two short-term petroleum funds, Crude Oil 2x Daily Bull (HOU) and Crude Oil -2x Daily Bear (HOD), could be forced to liquidate their assets if prices fall significantly, Horizons said in a statement. Monday. This could result in significant losses for investors, as the market value of the oil contracts underlying the funds is probably worth less than the value of the funds themselves. Prices became disjointed after funds stopped issuing new units last week amid wild oil price swings.

“It is imperative to note that the shares of HOU and HOD have and should continue to trade at a substantial premium over their net asset value while subscriptions for new shares are suspended,” said Horizons. “The manager continues to strongly discourage investors from buying HOU and HOD shares at this time. ”

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Oil continued to punish speculators looking for the bottom of the market on Monday. Brent crude fell below US $ 20 per barrel and West Texas Intermediate plunged 25% to US $ 12.78 as producers, traders and investors fell demand and a lack of storage space for the new crude still in production.

Horizons warned on Monday that if the WTI falls below US $ 10, there is a good chance that its funds will be forced to withdraw completely from the oil market, possibly causing severe pain to investors.

In recent weeks, retail investors in petroleum ETFs, such as HOU or United States Oil Fund LP (USO), have been particularly affected by price volatility. The funds are exposed to short-term futures contracts, based on barrels of WTI oil, which are expected to be delivered in two or three months. These contracts, the so-called start of the futures curve, experienced the most significant price declines.

The HOU, which typically uses leverage to boost returns, both positive and negative, plunged 75% last week and an additional 24% on Monday.

USO, the world’s largest oil ETF, fell 15% on Monday, after falling 39% last week. The USO said on Monday that it was selling all of its holdings in the June WTI contract, turning into contracts for later dates.

The involvement of these large funds in the oil futures market could even exacerbate price fluctuations. Traders told Reuters that the June crude contract had gone down in part because ETFs like USO diverted their investments from June contracts to avoid being trapped as much as a week ago when the Oil contract fell to minus $ 37.63 a barrel.

Horizons funds face additional risks that could effectively close them. Neither fund directly holds WTI futures contracts, but instead uses derivatives to gain exposure to futures contracts. In the event of large variations in oil prices, the counterparties to these derivative agreements have the right to compel Horizons to settle.

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“Although the counterparties to HOU and HOD have not exercised these termination rights at this stage, this is the [fund] the manager’s view that if the current future contracts of July 2020 or August 2020 were to be settled within one day of less than US $ 10, the risk of termination of contracts by counterparties would increase significantly, “said Horizons .

If this happens, HOU and HOD unitholders may find that their investments are worth even less than they think. Horizons was forced to stop issuing new units last Tuesday, which means that the price of ETF units no longer tracks the value of the underlying assets, as would generally happen with ETFs.

As of Tuesday, for example, HOU shares were trading at a premium of 650% over the intraday net asset value of the fund (essentially the market value of the futures underlying the fund) as speculators flocked to the market. funds.

With a report from Reuters

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