Oil ETF Crisis Spreads to Hong Kong as Fund Tumbles 46%

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(Bloomberg) -- The unprecedented drop in U.S. oil futures is rippling through the world’s exchange-traded fund market, with the latest example in Hong Kong.

The Samsung S&P GSCI Crude Oil ER Futures ETF, whose holdings of the derivatives slumped 26% on Tuesday to $378 million, saw its traded units lose half their value for a time Wednesday. Closing down 46% at HK$1.79, the ETF had its biggest drop and lowest finish since trading began in May 2016. Volume was 720 million units, 15 times the three-month daily average, according to data compiled by Bloomberg. There were 1.7 billion units outstanding as of Tuesday, according to an exchange filing Wednesday afternoon.

Oil ETF Crisis Spreads to Hong Kong as Fund Tumbles 46%

Samsung Asset Management (Hong Kong) Ltd, which manages the fund, said in a late Tuesday exchange filing that the fund would sell its entire holdings of June oil contracts and buy September contracts. It also warned that in a “worst case scenario,” the net asset value of the fund may drop to zero and investors may suffer “a total loss” of their investments.

“There is a big tracking error after the ETF switches from tracking June futures to September futures,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong. “The value of the ETF evaporates by more than half because of the plunge in oil futures.”

In the U.S., the United States Oil Fund, the biggest ETF tracking crude prices, took a series of unusual actions after losing a third of its value in two days. It had to suspend the issuance of new shares, an action that could leave it untethered from prices it’s supposed to track.

ETFs are being rattled because of a quirk in the main U.S. oil benchmark, West Texas Intermediate futures, which requires anyone holding contracts after they expire to be able to take delivery of crude in the oil hub of Cushing, Oklahoma.

Storage tanks there could be completely full by May because of unprecedented lockdown measures to slow the spread of the coronavirus, which have decimated fuel demand. With fewer people able to buy crude and store it, liquidity in near-term contracts could dry up and create squeezes like Monday, when U.S. futures fell to as low as minus $40 a barrel. So ETFs are spreading their exposure into further-out contracts.

©2020 Bloomberg L.P.

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