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Leveraged Oil And Gas ETNs Dominate Inflows In March

Oil has been making headlines over the past one and a half years owing to huge swings in its prices. Oil prices took a U turn after touching a 12-year low this February. This is especially true as oil broke its near-term trading range and regained momentum, indicating that the worst might be over for the commodity (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs ). Notably, WTI crude surged near the $39 per barrel mark earlier this month while Brent jumped to more than $41 per barrel. However, prices retreated a bit over the last couple of trading sessions. With this, both WTI and Brent are up more than 6% since the start of March. Meanwhile, after touching a 17-year low on March 3, natural gas prices have also rallied so far this month. This shift made investors put huge amounts of money in oil and gas ETFs/ETNs that are wonderfully undervalued at current levels. In fact, these ETFs have seen the biggest asset inflows so far this month with the two ultra-popular ETFs – the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) and the VelocityShares 3x Long Natural Gas ETN (NYSEARCA: UGAZ ) – accumulating nearly $9.3 billion and $6.8 billion, respectively, as per ETF.com . Oil Rebound in the Cards? The latest boost in oil price came with improving demand/supply trends. Talks of production freeze from giant oil producers including Russia and Saudi Arabia had been among the rally’s biggest drivers. Meanwhile, disruptions in supply in Iraq and Nigeria have led to a tightening of supply, which albeit is short term (read: Oil ETFs in Focus on Oil Output Freeze Talks ). Signs of decreasing production can also be seen in the U.S. With oil drilling activity falling in the country, output is expected to continue to decline in the coming weeks. However, increasing production in Iran, a strong dollar and weak global economic growth could lead to further swings in oil prices. Given the uncertain backdrop for oil, investors are seeking to make quick profit from the current trend. UWTI with a leveraged factor of 3 times has been in demand this month. This popular leveraged fund targets the energy segment of the commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $10.62 billion in its asset base. The fund charges a higher fee of 1.35% per year and trades in high volume of 7.5 billion shares. UWTI accumulated almost 88% of its AUM in March so far and is up about 16.2% over the same time frame. In the natural gas world, UGAZ with AUM of $7.08 billion tracks the performance of S&P GSCI Natural Gas Index ER with a leveraged factor of 3 times. The fund also charges a high fee of 1.65% per year and trades in volumes of 1.2 billion shares. UGAZ has accumulated almost 96% of its AUM in March and has gained 11.6%. Investors should be careful while investing in leveraged exchange-traded notes (ETN), as these use derivatives instruments to amplify the returns of the underlying index. While this strategy is highly effective in the short term, their long-term performance could vary significantly from the actual performance of the underlying index due to a compounding effect. Link to the original post on Zacks.com

Dispelling Misconceptions On ETFs’ Place In The Market

By Max Chen and Tom Lydon As the exchange traded fund industry grows in size and accumulates over trillions of dollars in assets under management, some are concerned that the investment vehicle is beginning to sway markets or won’t hold up in times of severe stress, according to industry analyst ETF Trends . However, Joel Dickson, Head of Investment R&D at Vanguard Group, argued on the Financial Times that ETFs do not contribute to market volatility and will hold up in times of market stress, despite some concerns about the investment vehicle. First off, Dickson points out that the global ETF industry represents about $3 trillion in assets, compared to the $300 trillion in financial assets over all. Given the relatively small size compared to the rest of the financial market, Dickson argues that there would have to be something we aren’t seeing in ETFs for them to sway market volatility. ETFs, like stocks, trade on a stock exchange through a broker. This secondary market is responsible for most of the trading volume in ETFs. Dickson points out that in the U.S. daily data shows that the median ratio of ETF trading volume that took place on the secondary market was about 94% for equity and 83% for bonds. “The net result is that most ETF shares are traded between investors and do not result in any activity in the ETF portfolio,” Dickson said. “Based on this data it’s hard to argue that ETFs are a cause of market volatility. Niche products might have an impact in low-volume asset classes. But for the overall equity and bond markets, the answer has to be no.” Credit Suisses’s Victor Lin mirrored Dickson’s sentiments. In his research, Lin found that data shows ETF activity only drives a small percentage of volume for most stocks, reports Teresa Rivas for Barron’s . “Sampling data between January 2015 to January 2016, we found that increases in ETF flow driven trading (averaged over a month) for a stock did not consistently result in an increase in realized volatility for that stock (adjusted for market-wide changes in volatility) over a one-month timeframe,” Lin said in a note. With regard to ETFs struggling in times of market stress, which many pointed to during the events on August 24 last year, Dickson contended that the situation occurred due to structural problems of the exchanges rather than problems with the ETF wrapper. “Because ETFs are listed on an exchange, they are subject to the same demand/supply forces and circuit-breaker rules as ordinary equities,” Dickson said. “This is what happened on August 24: the spread between the bid and offer prices of listed stocks and ETFs widened and some were temporarily halted.” Since the structural problems were revealed in late August, many ETF providers have been in discussion with regulators and exchanges on ways to improve the market structure. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The Best And Worst Of February: Multi-Alternative Funds

Multi-alternative mutual funds and ETFs endured another tough month in February, losing 0.49% in the aggregate versus a one-month return of 0.48% for the Morningstar Moderate Target Risk Index. Although the category was down 6.12% for the year ending February 29 (slightly better than the Index return of -6.47%), macroeconomic and market forecasts have kept investor interest strong, with category-wide inflows of more than $18 billion for the year ending February 29. The biggest recipient of investor inflows was the John Hancock Global Absolute Return Strategy Fund (MUTF: JHAIX ), which saw its asset base grow by a whopping $3.58 billion for the year ending on Leap Day. On the flip side, the multi-alternative fund that suffered the biggest outflows was the Goldman Sachs Absolute Return Tracker Fund (MUTF: GARTX ), which saw its asset base fall by more than $966 million. Surprisingly, the differential between the annual return of the two funds, for the period ending February 29, was small: -4.77% for JHAIX and -5.20% for GARTX. For the month of February, the funds posted respective returns of -1.56% and -0.12%, which failed to make the top three – but also kept the two funds out of the category’s doldrums. Best Performers in February The three best-performing multi-alternative funds in February were: Grant Park Multi Alternative Strategies Fund (MUTF: GPAAX ) KCM Macro Trends Fund (MUTF: KCMTX ) Astor Macro Alternative Fund (MUTF: GBLMX ) Grant Park’s fund took the top spot among multi-alternatives in February, returning +3.65%. Its one-year returns of -0.47% still ranked in the top decile of the category, and that’s one of the reasons it was able to garner more than $93 million in investor inflows for the year ending February 29. The KCM and Astor Macro funds posted respective one-month gains of 3.13% and 2.83% in February. Since the Astor fund only launched on April 1, 2015, only the KCM fund had a one-year track record: Its annual return through February 29 stood at -8.45%, ranking in the bottom 30% of its category. This, along with its higher than average annual volatility of 12.16%, can help explain why investors withdrew $2.89 million from the fund for the year. Worst Performers in February The three worst-performing multi-alternative funds in February were: Granite Harbor Alternative Fund (MUTF: GHAFX ) Granite Harbor Tactical Fund (MUTF: GHTFX ) Palmer Square Absolute Return Fund (MUTF: PSQAX ) February was a tough month for Granite Harbor, as two of its alternative funds were the period’s worst performers. GHAFX fell a stunning 17.50%, and GHTFX dropped a nearly-as-bad 16.78%. For the year ending February 29, the pair of one-star rated funds were down 22.74% and 23.37%, respectively, each ranking in the bottom 1% of the category. The Palmer Square Absolute Return Fund looks a lot better by comparison, despite ranking as the third-worst multi-alternative fund in February. It lost 7.50% for the month and was down 19.24% for the year – both bad numbers, but considerably less so than Granite Harbor’s funds. Nevertheless, its outflows of more than $84 million were far steeper than either of the Granite Harbor funds, whose comparatively small sizes ($14.7 million and $12.5 million, compared to PSQAX’s $160.2 million) lead to smaller absolute outflows of $21.3 million and $16.6 million for the year ending February 29. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.