What Purpose Did UWTI/DWTI Serve?

Thursday is the final trading day for two popular crude oil trading instruments: VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return UWTI and VelocityShares 3X Inverse Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return DWTI. At the closing bell, Credit Suisse will no longer issue exchange-traded notes for the two ETNs, which will continue to trade on the OTC markets.

Credit Suisse hasn’t given an explanation for why the firm is choosing to discontinue the products, but the decision likely came about due to recent regulatory investigations into DWTI, UWTI and other leveraged trading products likely played a large role.

The DWTI and UWTI portfolios were comprised of options, swaps, short positions and other derivatives that targeted +/-3X exposure to oil prices. Unfortunately, due to their construction, both ETNs tended to underperform their targets over time. Since the beginning of 2013, WTI crude oil prices are down 44.5 percent. In that same time, UWTI was down 99.2 percent, while DWTI was up just 14.1 percent.

Never Meant To Be Long-Term Strategies

The ETNs were never designed to be held long term, and their holdings are structured to deliver levered returns on a one-day basis only. The contango associated with futures contracts and the time decay associated with options contracts severely eat into leveraged ETNs long-term performance. In addition, the ETNs had extremely high expense ratios in the 1.3 percent range, which also weighed on long-term returns.

Starting Friday

Once UWTI and DWTI are delisted following Thursday’s session, ETF.com warns that the two ETNs “will no longer have an active arbitrage mechanism to keep the price and net asset value aligned. That means traders should be even more cautious trading UWTI and DWTI on the OTC market.

Instead, investors may want to consider the ProShares Ultra DJ-UBS Crude Oil UCO is a 2X-leveraged oil play that traders can use in the future. However, a word of caution: UCO suffers from many of the same shortcomings when used as a long-term investment.