The leveraged oil exchange traded note’s (ETN) closure has many baffled about why it would liquidate due to imposed limits and regulations with NYMEX, when it doesn’t actually hold anything but is instead a debt note. Read on for answers!
Deutsche Bank is liquidating the PowerShares DB Crude Oil Double Long ETN (DXO) tomorrow. There are two reasons the note is closing down:
- Concerns over the Commodity Futures Trading Commission enacting new position limits on commodity futures this fall
- The fund is actually being liquidated because the New York Mercantile Exchange has started enforcing “accountability limits”
Matt Hougan for Index Universe reports that the NYMEX is finally exercising a power it held for years but until now, it has not been utilized. While the NYMEX did not force the closure of the note, Deutsche Bank could have simply reduced its exposure and looked for other ways to hedge its exposure to the underlying futures contracts.
But since ETNs guarantee perfect tracking of their indexes, they can’t risk even a small amount of error because this error is borne by the fund manager. In ETFs, tracking error costs are taken on by the shareholders.
Swaps aren’t a perfect option, either; although they don’t have tracking error, regulatory crackdowns could send the cost of swaps higher.
Some analysts think that the end result of the rising cost of swaps would be that down the line, ETNs would have to raise expense ratios anywhere from 1%-1.25%. Leveraged exposure would be even higher.
For more stories about commodity ETFs, visit our commodity ETF category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.