Tag Archives: ETNs

ETF/ETN Assets Drop 17.6% From Last October

U.S. listed exchange-traded fund and exchange-traded note (ETN) assets fell 17.6% year-over-year to $493 billion in October from $598 billion at the end of October 2007, according to the National Stock Exchange, or NSX. The NSX, the former Cincinnati Exchange moved to Jersey City, N.J. earlier this year. Net cash inflows were $6.8 billion, bringing the total net cash flow year-to-date through Oct. 31 to more than $109 billion.

The NSX said notional trading volume for ETFs/ETNs totaled a record $3.3 trillion during October, representing 38% of all U.S. equity trading volume. At the end of the month, the number of listed products totaled 806, up 28.5% from the 627 listed one year ago. The NSX monthly statistics include shares of open-end exchange-traded products, encompassing listed shares of investment companies, grantor trusts, ETNs and commodity pools. For the full report go to http://www.nsx.com/content/market-data

Barclays Says It’s Well Capitalized

As the world-wide liquidity crisis deepened, rumors floated around that Barclays, the creator of the iShares ETFs and iPath ETNs was planning on asking the British government for capital.  On Oct. 7, Barclays CEO John Varney denied it.

Today, Barclays released an Oct. 8 statement from the British government about discussions between the bank and the U.K. Financial Services Authority (FSA) and British Treasury.

Barclays says it is well capitalized, profitable and has access to the liquidity required to support its business. The bank said given the strength of its well-diversified business and the existing capital base, the regulators expect that Barclays can raise additional capital from investors and not need help from the government funding offered to other U.K. Banks.

Barclays seems pretty stable amidst the turmoil at other banks. So, investors in iPath ETNs should be safe. However, other financial institutions did say things were just hunky dory just before they went belly up, so let’s see how the market takes this.

Why didn’t the oil ETFs surge when oil spiked $25?

Oil prices saw the biggest one-day jump ever on Monday as the front month crude-oil contract rocketed more than $25 a barrel to $130 in midday trading on the New York Mercantile Exchange. By the end of the day, the October contract for light, sweet crude fell off its highs to close at $120.92, a 13.8% jump of $16.37.

So why did the oil ETFs and ETNs post percentage gains much less than half that?

· United States Oil (USO), a commodity pool which holds futures, leapt 6.03% to $87.62.
· iPath S&P GSCI Crude Oil Total Return Index (OIL), an exchange-traded note, jumped 5.6% to $64.57.
· Macroshares $100 Oil (UOY), which bet on the oil market through U.S. Treasurys, climbed 4.1% to $26.68
· PowerShares DB Oil Fund (DBO), a commodity pool which holds futures, rose 2.5% to $40.99
· The Energy Select Sector SPDR (XLE), which holds oil stocks, actually fell 1.8% to $70.

There were a multitude of reasons for the oil spike. Fears over the government’s $700 billion bailout plan and the potential inflation sent the dollar plunging. And lately, oil has been moving inversely to the dollar.

“Basically, there’s a strong negative correlation between the dollar and oil,” says Douglas Hepworth, director of research at Gresham Investment Management, a New York money manager. “It becomes a self fulfilling trading artifact. When the dollar is up, operators sell oil, and when oil is up, people sell the dollar. And the dollar was sold in the sentiment that if this new $700 billion dollar bailout is socialism, do we really want to hold dollars?”

In addition, oil fields in Texas and Louisiana are still shut down because of Hurricane Ike. Platforms are still out of commission in the Gulf of Mexico and companies need to check the pipelines to make sure they’re not leaking. These are coming back on line slowly. So, there was a real short-term squeeze on inventory and companies were tapping into the strategic oil reserve.

In addition, Monday, was the day the October contract expired. So, if you wanted oil for delivery on Oct. 1 you needed to get in the market. And if you wanted to not be holding, you needed to sell or close a position. This was the last chance for refineries and other oil companies to buy and get delivery next week. It created a short squeeze and sent the price of crude soaring.

At the end of Monday’s session, the November contract was scheduled to become the front-month contract, so some investors thought there might be a play to profit on here.

So, why didn’t the oil ETFs see a similar rise?

They didn’t own the October contract.

“USO along with the other commodities ETFs doesn’t own the contract up until the expiration,” says John Hyland, the portfolio manager of USO. So, while the October contract closed up 14.78%, USO owned the November contract which only rose 6.44%. At the end of the day, USO’s NAV was up 6.46%

Hyland says all the commodity ETFs had sold the contract one or two weeks ago. The commodities ETFs don’t hold the front-month contract until the expiration because it’s too risky. He says “unless you’re an oil company and you want to take deliver you would never want to hold them the last week. The last week is mostly trading by oil companies and revenue, someone who will actually get delivery.” If the ETF held the contract on Monday, it was going to have to take delivery of actual oil and none of them want to do that. Where do you store it?

So, it’s normal for the ETF to roll out of the front-month contract and into the second-month in the last two weeks to the movement.

“You won’t see anyone on the last day of trading a contract who is not in the physical market,” says Gresham’s Hepworth. “You basically play a game where you have to make or take delivery. You might occasionally see someone inexperienced who has a position on the last trading day. Well, they will never do that again.”

Hepworth says the October market was an illusion with just a few players playing a high stakes game of poker. The ETFs mirrored the real market, which was the November contract.

Anonymous sources said that high stakes poker game was being played by Chevron, ExxonMobile and BP. Rumor has it that BP was short and needed oil for its October operations and that the other two took them to the cleaners.

My Book Has Hit the Bookstores.

ETFs for the Long Run enters the bookstores this week!!!

If you like this companion blog and you want to learn more about the intracacies or ETFs, exchange-traded notes (ETNs) and other exchange-traded vehicles (ETV) that track commodities and currencies pick up a copy of my new book. ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing.