Why Credit Suisse Is Closing Its Popular Oil ETNs
It's usually not big news when an exchange-traded product is shut down. Dozens of ETPs are routinely shuttered each year due to lack of interest from investors. In those cases, it makes total sense for an issuer to close a product that's not popular and likely not profitable.
That's what makes last week's news that Credit Suisse intends to delist two of its oil ETNs so surprising. The VelocityShares 3x Long Crude Oil ETN (UWTI) and the VelocityShares 3x Inverse Crude Oil ETN (DWTI) are anything but unpopular. As of Friday, the two had assets of $1.6 billion and $222 million, respectively―amounts that would make many issuers envious.
“It’s completely unusual," said Eric Balchunas, senior ETF analyst for Bloomberg. "UWTI is the first ETF or ETN with over $1 billion in assets to close.”
According to a Credit Suisse press release, the firm is making the move to delist these products to "better [align] its product suite with its broader strategic growth plans."
If the firm's recent moves are any hint, those strategic plans may include an exit from the exchange-traded note (ETN) business. Earlier in November, Credit Suisse announced plans to shut down another one of its ETNs, the Credit Suisse X-Links Cushing MLP Infrastructure ETN (MLPN), which also has substantial assets—more than $500 million.
"It's become clear that Credit Suisse is trying to clean up its balance sheet," explained Dave Nadig, CEO of ETF.com. "Since these products are large and therefore probably quite profitable, it's not a ‘pruning’ exercise. And because the underlyings are oil, there's zero chance this is an inability-to-hedge problem. The only remaining reason to shutter them is to clean up the liabilities on their balance sheets.”
ETN Launches Slow
Unlike traditional ETFs, ETNs are a liability for the issuing company―typically big banks. In a year in which Europe's banking woes have been widely advertised, it makes sense that Credit Suisse, and others, may be trying to shrink their liabilities any way that they can.
“Launches are down," according to Bloomberg's Balchunas. "There’ve been 14 ETN launches in a year with 208 launches, and you’ve seen about 20 ETNs close or delist. You have twice as many ETNs going away as entering the market—that’s the opposite of the ratio ETFs are seeing.”
UWTI & DWTI Condemned To Slow Death
Although some issuers may be shunning them, ETNs still have assets of about $25 billion, equal to the amount of money in actively managed ETFs. Moreover, for investors, in some cases they can be advantageous compared to ETFs.
“I think ETNs get a bad rap, and they’re on a lot of people’s ‘do not invest’ lists, but they’re incredibly good from a tax standpoint for certain areas; namely, futures and MLPs," said Balchunas, who noted that 75% of ETN assets are in products that track futures or MLPs.
"In the ETF structure, the tax consequences are not as ideal, and there can be nasty surprises for people. The ETN, in many ways, has been a workaround of sorts to unfavorable tax treatment on the ETF side,” he added.
As for UWTI and DWTI specifically, the two ETNs will continue trading as normal through Dec. 8. After that, they will be delisted from the NYSE Arca and will only be traded over-the-counter, if at all. Credit Suisse will also suspend further issuances of the ETNs after that day.
For most holders of the notes, the best course of action is to sell out by Dec. 8, after which, liquidity will dry up, and the ETNs may not track their net assets values. Thus, while Credit Suisse isn't yet closing UWTI and DWTI completely (the firm may still opt to accelerate the redemption of the ETNs at any time prior to their maturity on 2032), they are effectively condemning the products to at least a slow death.
Credit Suisse Shifting Gears?
As for Credit Suisse itself, the bank is unlikely to be in the ETN space much longer. As Dave Nadig notes, "The writing is on the wall for all Credit Suisse ETNs."
That doesn't mean they'll abandon the exchange-traded space entirely. Bloomberg's Balchunas speculates that the firm could come out with a line of traditional ETFs in the future.
“If you look at J.P. Morgan, Goldman Sachs and Deutsche Bank, these three firms have all made concerted efforts to launch ETFs out of their asset management arms and compete with the likes of BlackRock and Vanguard," Balchunas said.
"These firms all have ETNs, but they’re almost like orphans,” he added. “They’re really not under the same umbrella, and it seems these big Wall Street banks have decided to shift to competing with more 40-Act, plain-vanilla ETFs as opposed to doing ETNs. That’s the bigger trend that this [move by Credit Suisse] could be part of. But again, I don’t know, because the statement they put out is very minimal.”
"We’ll know in the future if Credit Suisse comes out with a line of smart-beta ETFs that this is what they were doing,” Balchunas noted.
Contact Sumit Roy at sroy@etf.com
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