Price dislocation forces ETF provider to suspend subscriptions

CEO explains why he's discouraging new investors from buying his oil ETFs, outlines options for those already holding funds

Price dislocation forces ETF provider to suspend subscriptions

After extreme price volatility in the price of oil resulted in a disconnect between the value of two of their ETFs and their underlying net asset value, Horizons ETFs is urging investors not to buy into those two funds.

In a media conference call on Wednesday, Horizons CEO Steve Hawkins explained the steps the fund provider has taken to prevent their BetaPro Crude Oil 2x Daily Bull ETF (HOU) and their BetaPro Crude Oil -2x Daily Bear ETF (HOD) from being forced to liquidate. On April 21, Horizons announced it would not be accepting new subscriptions for shares of these ETFs. Hawkins stressed that the price dislocation has resulted from unprecedented market conditions and that those still invested in the funds have options at their disposal.

“We’ve seen unprecedented volatility in crude oil futures market in the past ten days,” Hawkins said on the call. “Horizons has been in constant contact with its counterparties who provide the ETFs with exposure to the crude oil contracts and those counterparties over the past 10 days have become increasingly concerned with their ability to continue to provide that exposure…at which juncture, the only practical alternative for the ETFs would be to effectively convert them to cash.

“We strongly discourage new investors to buy into these ETFs right now, if they want to make a bet on oil there are other products out there that are not Horizons products that they can use to do so.”

Hawkins explained that to avoid a liquidation, Horizons has reduced the leverage on these ETFs and changed their underlying methodology, shifting the futures contract out to September, hoping that oil prices will stabilize by that juncture above a $10 price for West Texas Intermediate Crude (WTI). If prices sit below $10 Horizons’ counterparties might exercise their termination rights and force the ETFs to liquidate.

While they’re not accepting new subscriptions for these ETFs and discouraging new purchases, Hawkins said that investors currently holding the funds can sell if they want, citing an existing market for the ETFs. He reiterated, though, that in repositioning the funds, investors holding them are currently exposed to the September crude oil futures contract, if it goes up, so too will those funds.

He stressed, as well, that if the ETFs are forced to liquidate they would go to cash, rather than to zero. He says that investors should talk to their advisors to find out if holding or selling the ETFs is the right move right now.

Hawkins is confident that oil prices will stabilize and the suspension on subscriptions will be lifted, at which point these ETFs should trade efficiently again.

“In their 12-year history these ETFs have delivered the underlying exposure from a day over day NAV perspective, every single day correctly,” Hawkins said. “It's only because of this unprecedented event in the oil futures market, that we're dealing with this. While we sympathize with investors who hold these ETFs that their value has decreased, it's important to realize that the entire economy is feeling the effects from this global pandemic and there are additional factors that magnify those effects on the oil futures market in particular right now. Simply, crude oil is under complete duress right now because of the global pandemic.”