UWTI: Crude Oil Fund Among Top Trades on the Market

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It’s no surprise that the most heavily traded security on any given day is an S&P 500 exchange-traded fund or perhaps Bank of America Corp (NYSE:BAC), which are couple of names that routinely hit the top of the list for highest daily volume.

UWTI: Little-Known Crude Oil Fund Among Top Trades on the Market

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But what about the VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI) — a relatively obscure, market-tracking exchange-traded note intended for sophisticated investors like professional energy traders?

UWTI: From Four Digits to Eight

On a day in which the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) traded 85 million units and BAC did volume of 71 million shares, more than 68 million units of UWTI exchanged hands.

Heck, UWTI topped 90 million shares in a day at one point in February, and hasn’t traded less than 40 million shares in a session since the end of January.

But what’s really interesting is that not too long ago, UWTI did the same kind of volume as any other obscure, niche ETN or ETX.

That is say, it did very little.

In 2014, UWTI’s monthly volume was routinely in the thousands of units. Indeed, until recently, UWTI topped 20,000 units in daily volume only twice since its 2012 debut. Plenty of days saw volume in the low thousands, and sometimes even in the hundreds.

The difference between now and then, of course, is the collapse in oil prices. Apparently that has made a levered, long bet on oil futures a very popular intraday trade.

As an ETN, although UWTI is similar to an exchange-traded fund, it’s actually a debt product that doesn’t actually own any underlying stocks. For practical purposes, it works pretty much like an ETF by tracking an underlying benchmark (albeit with less drift.)

In this case, UWTI is linked to the S&P GSCI Crude Oil index, a widely followed benchmark for investment performance in the crude oil market. Moreover, UWTI is a levered product. With three times long leverage, UWTI triples the performance of its benchmark index on a daily basis  — for better or for worse.

A Way to Play a Bottom in Crude Oil?

True, leverage is extremely dangerous and can leave an investor in a deep hole if the bet goes against him. UWTI, however, is aimed at professional traders, where trading with leverage isn’t just routine, but necessary. Indeed, 3x leverage is peanuts for plenty of hedge funds. (These levered ETNs and ETFs exploded in popularity during the financial crisis when frozen credit markets made it impossible for hedge funds and other pros to lever their bets.)

That leverage makes it easy to use UWTI as a bullish bet on oil prices.

After tumbling to less than $50 a barrel from more than $110 last summer, crude oil futures started showing some volatile signs of life last month. That has made it possible to profit on levered long bets, especially on days when oil prices make a solid move to the upside.

As much as UWTI isn’t meant for retail investors (you have to rebalance everyday, for one thing), it does offer a window into professional sentiment on the state of oil prices.

Sure, some of this action is going to hedge positions. But with so much volume chasing the long side of crude oil, the market is saying that prices have finally bottomed out.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/uwti-crude-oil-etn-velocityshares/.

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