ProShares’ short and leveraged oil ETFs to adopt new index

Sep 10th, 2020 | By | Category: Commodities

ProShares has announced that its two leveraged oil ETFs will adopt a new underlying index in a bid to make the products more resilient to future disruption in crude oil markets.

ProShares upgrades index behind controversial leveraged oil ETPs

ProShares has changed the index underlying its leveraged oil ETFs.

The ProShares Ultra Bloomberg Crude Oil (UCO US) and ProShares UltraShort Bloomberg Crude Oil (SCO US) currently provide 200% and -200%, respectively, of the daily return on the Bloomberg WTI Crude Oil Subindex.

The index provides exposure to front-month futures contracts for West Texas Intermediate (WTI) crude oil.

As of the end of trading on 16 September, however, the ETFs will switch to providing the same degree of leveraged and inverse leveraged exposure but to the Bloomberg Commodity Balanced WTI Crude Oil Index.

The new index consists of equally weighted positions in three WTI futures contracts – one-third tracks front-month futures, the second follows a June annual roll schedule, and the final third follows a December annual roll schedule.

The weights among the three contracts are equally reset semi-annually in the months of March and September.

Oil market volatility has become a live concern for investors, regulators, and product providers alike following the events of April this year during which front-month WTI futures crashed into negative territory.

Extreme conditions in energy markets over this period ultimately contributed to the suspension or closure of a number of oil ETPs, including ProShares’ triple leveraged oil products, while others were forced to alter their strategies in a bid to survive.

Californa-based issuer United States Commodity Funds (USCF) was compelled to push out the futures exposure of its United States Oil Fund (USO US), the largest oil ETP globally, to as far out as June 2021 and expand the product’s mandate to include futures contracts for other types of oil and hydrocarbon fuel.

While oil markets have since stabilized, this does not preclude a return to volatility. Analysts have highlighted the potential for a resurgence in Covid-19 infections to once again weigh heavily on crude prices.

ProShares’ decision to immunize the index against such volatility is in effect an attempt to future-proof the ETFs.

But ProShares and USCF are still facing controversy, however, as both firms are on the wrong end of class-action lawsuits pertaining to the management of USO and UCO during the volatile oil market period.

According to the complaints, the defendants are charged with failing to sufficiently disclose risks inherent in oil futures markets at that time, risks that were heightened due to trading inefficiencies caused by the firms issuing hundreds of millions of dollars’ worth of new shares in the ETFs.

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