CS Credit Suisse Group

By Asjylyn Loder 

With just days left to bet on oil prices using two of the most popular and controversial products on the market, competing exchange-traded fund companies are racing to fill the gap.

ProShare Advisors LLC on Monday announced its plans to launch triple-leveraged oil exchange-traded funds. And US Commodity Funds, the company behind the U.S. Oil Fund ETF, filed a preliminary prospectus to do the same on Nov. 29.

Both companies are competing to replace two exchange-traded notes issued by Credit Suisse AG. Credit Suisse announced Nov. 16 that it will delist the VelocityShares 3x Long Crude Oil ETN and the VelocityShares 3x Inverse Crude Oil ETN. The products will be delisted after Thursday.

ProShares' existing oil ETFs have seen an uptick in volume and assets since the Credit Suisse announcement. The company's two oil futures ETFs, which provide doubled exposure to the rise and fall of oil prices, traded record volume on Nov. 30, the day the Organization of the Petroleum Exporting Countries announced that it would cut oil production to curb a global supply glut.

"I wouldn't be surprised if some of the increase in volume is attributable to the announcement," said ProShares Chief Executive Michael Sapir.

Credit Suisse has been trimming its exchange-traded business as financial regulations push banks to shrink their balance sheets and hold more capital against possible losses. ETNs trade in real time like ETFs, and promise to deliver the returns of stocks, bonds and commodities. But ETFs own the assets they're meant to track, while ETNs are debt issued by banks promising to pay the same return as investments ranging from crude oil to Indian stocks. If a bank can't pay its debts, ETN investors can be left with nothing.

Investors are also shifting away from Credit Suisse's popular ETNs tied to the CBOE Volatility Index, Wall Street's "fear gauge." Credit Suisse has not said whether it will delist or liquidate its volatility ETNs, but ProShares has also seen an uptick of trading and assets in its competing products.

"It could be related to investor concern about the long-term viability of ETNs," said Sapir.

Triple-levered products have come under fire from regulators after retail investors got burned. The daily rebalancing of leveraged products can substantially erode returns, and issuers warn that the ETFs aren't intended for buy-and-hold strategies.

Both ProShares and U.S. Commodity Funds will use a commodity pool structure that will exempt the funds from certain requirements under the Investment Company Act of 1940, including investor protections overseen by the U.S. Securities and Exchange Commission. Rules proposed by the SEC last year would limit the use of leverage and derivatives by retail investment funds governed by the law.

Write to Asjylyn Loder at asjylyn.loder@wsj.com

(END) Dow Jones Newswires

December 05, 2016 17:49 ET (22:49 GMT)

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