The pipeline for new passive products is thriving. The world’s biggest credit ETF is hitting records. Even a notorious oil fund is rising from the near-dead.
Q1 2020 hedge fund letters, conferences and more
As inflows soar and market dislocations vanish, America’s exchange-traded fund market is back to the boom times — consigning to history two major disruptions of the pandemic crash.
The question is whether the lessons are being forgotten as fast, from the risks of marketing commodity products to retail investors to the price-discovery dangers in fixed income.
It’s been just two months since negative oil prices roiled commodity funds, and three since a historic schism opened up between bond ETFs and their underlying assets. Yet both are distant memories.
As Gary Stringer, chief investment officer at Stringer Asset Management, puts it: “It’s largely business back to normal” for the $4.3 trillion industry.
Less than a week ago, the Securities and Exchange Commission cleared the United States Oil Fund, ticker USO, to issue 1 billion new shares, paving the way for inflows to the world’s largest oil ETF after a nearly two-month freeze.
It’s a milestone moment for the fund that may help draw a line under its near-implosion, even as many of the questions raised by the episode remain unanswered.
The extraordinary steps taken by the ETF to protect itself from sub-zero crude prices in April shone a light on the risks posed by all funds investing in futures contracts, rather than in the assets underpinning those agreements. They also highlighted the danger of a huge fund like USO, with $5 billion in assets, operating in a relatively small market.
While the fund recorded outflows in its first trading days since the freeze ended, it has hardly been a torrent. Some $100 million has left the ETF, whose shares are up about 60% since their April low thanks to a recovery in crude.
“People’s memories are very short,” said David Pursell, the CEO of Core Alternative. “Greed is a driving force for all of this. If they see something moving quickly, they are apt to jump in.”
At a time when the surge of new retail investors is the talk of Wall Street, the worry is that history could repeat.
Right before the fund crashed, mom-and-pop investors had piled into USO to try to surf any oil price recovery. Both the SEC and the Commodity Futures Trading Commission are said to have opened probes into whether the risks of the fund were properly disclosed.
For many pros, the lesson of USO is simply buyer beware. Some argue it shows certain assets shouldn’t be in an ETF wrapper, while others tout the proposed re-naming of fund types being pursued by a group including BlackRock Inc., which they argue would help investors realize the varying risks.
Read the full article here by Katherine Greifeld, Claire Ballentine, Advisor Perspectives
