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VelocityShares ETN Escapes ‘Trigger Event’ Even as Oil Collapses

Luke Kawa
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VelocityShares ETN Escapes ‘Trigger Event’ Even as Oil Collapses

(Bloomberg) -- The swift swoon in oil nearly wiped out an exchange-traded note that provides magnified exposure to swings in crude prices.

The VelocityShares 3x Long Crude Oil ETN (ticker UWT), issued by Citigroup Global Markets Holdings Inc., plunged 71% on Monday. The product provides investors three times the daily move in crude prices through its ownership of the front two futures contracts of West Texas Intermediate oil.

UWT, which started trading in December 2016, is down nearly 92% this year alone, and had shrunk to just $480 million in assets coming into this week. That means most of the $730 million in flows received in 2020 have evaporated.

Based on Friday’s closing value, the net indicative value of the fund would have to fall 75% to below $0.975 to constitute a so-called “trigger event,” according to the note’s prospectus. VelocityShares and Citigroup declined to comment. At its lows of the day, the indicative value of UWT was down more than 73%.

Oil crashed the most in 29 years as Saudi Arabia and Russia vowed to pump more in a battle for market share just as the coronavirus spurs the first decline in demand since 2009. Futures slumped by about 25% in New York and London Monday.

A separate VelocityShares note, the Daily Inverse VIX Short-Term ETN (ticker XIV), was infamously felled in February 2018 after the Cboe Volatility Index more than doubled from 17.3 to 37.3 in one day. There’s no indication this product has the ability to touch off similar feedback loops in the underlying and related asset classes.

“The sudden crash in oil has put UWT in the danger zone of getting XIV-ed today,” said Eric Balchunas, senior ETF analyst with Bloomberg Intelligence. “A termination of the note would really just add insult to injury given how severely painful this trade is right now -- and has been all year.”

(Updates prices.)

--With assistance from Brendan Walsh.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Randall Jensen, Rita Nazareth

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