OOO - Betashares Crude Oil Index ETF - Currency Hedged (Synthetic)

[Dona Ferentes]

Did anyone listen to the most recent Macrovoices Hot Topic with Jim Bianco?

I would suggest any OOO investors take a listen.

can but agree. ... 50 minutes well spent, and most of the questions asked here should be answered. (Have just read through this thread)

 

[InsvestoBoy]

One question I have is to what extent is this ETF, or more importantly its US equivalent, making the market rather than tracking it?

At this point, USO and friends have definitely become the long side of the market.

If the ETF holds a decent portion of the futures contracts as seems to be the case, and needs to sell them prior to expiry because they sure don't want physical delivery, well then the ETF would seem to be a key driver of the plunge to negative values which occurred would it not? It was the ETF that simply had to exit no matter how low the price went, right?

No because the ETF had already rolled to the next month contract long before prices went negative.

Now that the dust has settled it is apparent the culprits were some doofuses on Interactive Brokers who held about 15% of the Open Interest, plus Bank of China who were abusing their "bonafide hedger" status at the exchange to sell structured products to their customers.

If that's the case then the ETF at least with its previous mode of operation is too big to be effective.

Yes. If you listen to the podcast episode I suggested, you will see why this is about to become a huge problem, forget what we just saw.

Now I wonder what other ETFs might have this probem?

Other oil tracking ETFs, yes. Other commodity tracking ETFs which hold oil futs, maybe. Otherwise probably not many if any.

 

[derangedlawyer]

https://www.asx.com.au/asx/share-price-research/company/OOO

On 21st April futures price went in the negative xx$.. this ETF was trading at 4.24. Following day (22nd April) oil recouped in positive digits but OOO dropped to 2.6 which is a massive 39% drop in a day.
On 23rd April they announced (https://www.asx.com.au/asxpdf/20200423/pdf/44h5v9q79z7nnl.pdf) a "TEMPORARY CHANGE TO OOO’S UNDERLYING FUTURES EXPOSUREFROM ONE-MONTH TO THREE-MONTH WTI CRUDE OIL FUTURES CONTRACTS".

What is going on with this ETF?
Doesn't seem to track oil's upwards movements at all.
Including today 29th April which was a good day for oil futures, nevertheless OOO's market maker still set the price at yesterday's value of 2.52.

Thoughts on this?
I am considering contacting the regulators.

 

[InsvestoBoy]

I am considering contacting the regulators.

Gonna call up and say you didn't read the PDS or understand the market but you thought it'd be a good punt and demand they take action? Let us know what they say.

 

[aus_trader]

The problem is these are synthetic ETF products. They stop corelating to the underlying when Oil starts doing funny business like going into the -ve.

The equivalent US ETF "USO" is supposed to do a reverse split and may attract some traction as it has also been hosed down lately. Not sure how much this will affect the local ETF "OOO".

 

[cutz]

Bloody crazy, the fund need to be shut down till things stabilise. Too many shmuks investing in things they don't understand !

Tonight should be interesting post split..

 

[InsvestoBoy]

The problem is these are synthetic ETF products. They stop corelating to the underlying when Oil starts doing funny business like going into the -ve.

No, aside from retail bidding it up above NAV, it doesn't stop correlating to the underlying, because the underlying is WTI futs.

People think it stops correlating because they didn't do any due diligence at all and just saw some chart on the evening news saying oil was down and think they can pull a Rockefeller using SelfWealth or something? They never looked at the chart compared to cash WTI to see it is nearly always getting eaten by contango, they never looked at the PDS, they never even looked at the iNAV.

 

[Dona Ferentes]

from the AFR

A statement of the bleeding obvious from exchange traded fund provider BetaShares has come a little too late for investors wrong-footed by the volatility in oil prices. In its third update to the ASX in five days, the purveyor of the BetaShares crude oil index ETF riffed on the immediate rollover of near-month oil futures contracts announced by S&P Dow Jones Indices, which provides the index upon which their ETF is based.

The unscheduled rollover of the West Texas Intermediate contract from the June contract to the July contract prompted BetaShares to lament that "the announcement by the index provider is further confirmation of the high level of risk associated with exposure to the near-term WTI crude oil futures contract."

You don't say? The problem is that up until last week that very exposure was the bedrock of its investment strategy and that of large overseas exchange traded products like the US Oil Fund.

Having watched the value of its ETF plummet from a high of $16.56 on January 6 to a record low of $2.50 on Wednesday, the BetaShares ETF has switched its exposure from the near term month contract to the September contract.

While a higher tracking error won't deliver investors the exposure they thought they were buying, it is hoped the September contract will be less volatile and insulate it from another bout of negative prices.

BetaShares was blunt about the consequences of negative prices in an updated product disclosure statement: "In such circumstances the responsible entity may need to consider whether the fund should be terminated.”

The surprising move by S&P Dow Jones Indices - and its launch of a review of its commodity indices, rollovers, and negative oil prices - looms as the denouement for futures-based exchange traded oil products.

It highlights how the combination of oversupply and demand destruction sparked by COVID-19 - and the attendant warping of prices into negative territory - has investors scrambling for a solution amid expectations for a protracted period of weak and volatile prices.

The profound flaws of oil ETFs have been revealed by the swelling glut of oil that pushed WTI prices to negative $US40 a barrel last week.

The market contango, or when longer term prices are higher than short term prices, has made them forced sellers at low prices and motivated buyers at high prices.

The bringing forward of the rollover from the June contract to July contract saw the contango between the two widen to over $US7 a barrel at one point.

 

[wabullfrog]

Hi all, first post & here to admit as newbie investor I look to have made my first not so good (slight understatement there!) buy with OOO. Purchased 4 weeks ago & thought I was a genius when price rose during the next week, following weeks have shown I am very far from that

 

[derangedlawyer]

The problem is these are synthetic ETF products. They stop corelating to the underlying when Oil starts doing funny business like going into the -ve.

The equivalent US ETF "USO" is supposed to do a reverse split and may attract some traction as it has also been hosed down lately. Not sure how much this will affect the local ETF "OOO".

Fair point.
USO however has been signficantly more stable than OOO, overlapping the two charts in the last 2 weeks.
I guess my point is that a 39% drop in one day like the one mentioned in my post above and a stark misreprentation of the underlying asset are different from minor discrepancies and loss of value normally expectable in ETFs.

Bloody crazy, the fund need to be shut down till things stabilise. Too many shmuks investing in things they don't understand !
Tonight should be interesting post split..

It's schmuck. You sarcastic schmuck.

No, aside from retail bidding it up above NAV, it doesn't stop correlating to the underlying, because the underlying is WTI futs.

People think it stops correlating because they didn't do any due diligence at all and just saw some chart on the evening news saying oil was down and think they can pull a Rockefeller using SelfWealth or something? They never looked at the chart compared to cash WTI to see it is nearly always getting eaten by contango, they never looked at the PDS, they never even looked at the iNAV.

The three points you seem to make:
1- I didn't read the PDS and never monitored the fund's iNAV
2- I wasn't aware the underlying of this ETF being S&P GSCI crude oil index nearest contract futures
3- Contango justified a 39% drop in one day from 21st to 22nd April.
On 21st April futures price went in the negative xx$.. this ETF was trading at 4.24. Following day (22nd April) oil recouped in positive digits but OOO dropped to 2.6 which is a massive 39% drop in a day.

Please prove #3.
For convenience, go to page 32 of https://www.betashares.com.au/files/collateral/pds/QAG-OOO-QCB-pds.pdf and enlightmen me of what could have justified that drop.

 

[peter2]

This is for you @cutz . "I'm itm".

 

[Dona Ferentes]

itm; is that like lol?

@disturbedavocado Thou doth protest too much, methinks

 

[cutz]

This is for you @cutz . "I'm itm".

View attachment 103058

Ha ha, congrats, It's WTFITM !!

 

[aus_trader]

No, aside from retail bidding it up above NAV, it doesn't stop correlating to the underlying, because the underlying is WTI futs.

People think it stops correlating because they didn't do any due diligence at all and just saw some chart on the evening news saying oil was down and think they can pull a Rockefeller using SelfWealth or something? They never looked at the chart compared to cash WTI to see it is nearly always getting eaten by contango, they never looked at the PDS, they never even looked at the iNAV.

Well, I am not saying it doesn't have problems like contango which slowly eats away at it. But in the past I remember it behaved somewhat like other ETFs that track the underlying. So "OOO" will be up when POO is up and it'll be down when POO is down. That relationship is broken at the moment, so that's the problem.

Tonight should be interesting post split..

Yes, looking forward to it to see if USO gets some attention and goes higher afterwards.

Then whether that gets reflected in some way on the local market with "OOO" tomorrow...

 

[aus_trader]

Hi all, first post & here to admit as newbie investor I look to have made my first not so good (slight understatement there!) buy with OOO. Purchased 4 weeks ago & thought I was a genius when price rose during the next week, following weeks have shown I am very far from that

I think a lot of people including professional traders/investors and investment funds, all got caught by this debacle. This is history in the making and we are still in the middle of it

 

[aus_trader]

This is for you @cutz . "I'm itm".

View attachment 103058

View attachment 103061

Pre-market is getting the price about right:
Prev. Close = $2.14
8:1 consolidation: 8 x $2.14 = $17.12

It'll be what happens once the market opens, that'll be interesting. up/down ?

 

[Smurf1976]

I think a lot of people including professional traders/investors and investment funds, all got caught by this debacle.

I think there's a broader point that just because two things are correlated, even if they are highly correlated, does not mean they are the same. It is thus not impossible that the correlation fails or even outright reverses at some point.

OOO and the spot price of crude oil are one example of that since they aren't actually the same thing.

Another example would be that owning shares in several major airlines and trucking companies is a sort of short position in oil. Arguably true if the only thing that happens is the oil price falls but most certainly not true if the reason for the oil price falling is that every airline in the world is all but grounded and people are in lockdown.

Another example would be the idea that the Australian Dollar is tied to commodity prices. No doubt there are possible scenarios where that fails. Etc.

I think the broad lesson here applies far more widely than just to this ETF. Correlations aren't direct ties and can fail which gives rise to the scenario where someone gets it right in terms of the price direction of something but completely fails at profiting from it because they traded an instrument that failed to replicate the price move despite having historically done so.

 

[peter2]

@aus_trader Unfortunately the retail (dumb) money will buy USO with all they've got. The hedge funds will short it and take the money from the retail buyers every month while the price contango exists. My US broker stopped allowing shorts on USO a while ago. I'll be interested to see if they'll allow it now the price is much higher.

That 50min podcast is a must watch. Thanks @InsvestoBoy for the link.

@Dona Ferentes Cutz is an options trader so I knew he'd know what itm means immediately.

Read the latest OOO announcements. Betashares has rolled to the Sept contract (three months out). Within days the administrator (S&P) of the underlying index has now moved one month out. They're all scared of negative values when the June contract expires (two weeks time). They're rolling the problem down the road hoping it'll be OK in the future.

I expect Trump to encourage every US citizen to fill up their cars with gas and go for a drive every week-end to MAGA.

 

[InsvestoBoy]

On 21st April futures price went in the negative xx$.. this ETF was trading at 4.24. Following day (22nd April) oil recouped in positive digits but OOO dropped to 2.6 which is a massive 39% drop in a day.

Please prove #3.

What you think was the "21st April futures price" that went negative and subsequently rebounded was the about-to-expire May 2020 contract.

OOO was not holding the May 2020 contract at the time. So what you think you saw on whatever chart you look at, and the underlying futures contract that OOO was holding at the time (June 2020) are not the same thing.

That same day, the June 2020 contract traded down from >$20 to $6.50 before bouncing. So what you saw in OOO was the result of mere price action in the June 2020 WTI contract.

On the other hand, if the price had tracked the price of May as so desperately wish, OOO would just be straight up bankrupt.

 

[InsvestoBoy]

Well, I am not saying it doesn't have problems like contango which slowly eats away at it. But in the past I remember it behaved somewhat like other ETFs that track the underlying. So "OOO" will be up when POO is up and it'll be down when POO is down.

The narrower the spread between spot and the front month is, the more that it will appear as if OOO is "behaving somewhat", but that doesn't mean anything except that the spread is narrow. It doesn't mean that the spread can't widen, in either direction. It could go into deep backwardation and OOO might start outperforming what you see as POO.

That relationship is broken at the moment, so that's the problem.

It's really not broken. OOO does not track the spot price of oil, no matter what you think. It holds the constituents of and tracks an oil futures index.