Not that leveraged exchange traded products should be held for long time frames, but if a trader had been brazen enough to hold the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) for two years, that trader would be quite happy as DWTI has returned 715% over that period.
DWTI, which takes the three times inverse or -300% performance of crude oil, has clearly benefited from slumping crude prices and if some banks are correct in their bearish outlooks, DWTI could deliver more near-term gains.
While crude oil prices are breaking down, Wall Street analysts anticipate further weakness ahead. Morgan Stanley analysts, including Adam Longson, head of energy commodity research, argue that investors are putting too much emphasis on fundamental factors and are not paying attention to an appreciating U.S. dollar.
Goldman Sachs Group has also forecast oil to drop to $20 per barrel but attributes further weakness to potential storage tank limits as producers keep pumping until they completely fill up storage space and halt some production.
However, some traders have recently been taking profits in DWTI, sparking massive asset flight from the high-flying exchange traded note.
“Unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note (ETN) – which offers the ability to make a bearish bet on prices magnified threefold, with gut-churning ups and downs – bailed out early this week after jumping into the fund in January, ETN data show,” reports Reuters. “Some 1.8 million shares worth more than $602 million were redeemed on Tuesday, the largest outflow from the ETN in the past year, according to data from FactSet Research.”