Horizons ETFs issued what essentially amounts to a warning this morning related to its BetaPro Crude Oil 2x Daily Bull ETF (TSX: HOU) and BetaPro Crude Oil -2x Daily Bear ETF (TSX: HOD) due to ongoing market volatility. The ETF operator issued a news release “reminding” investors that the derivative counterparties for these ETF’s are entitled to certain termination rights.
These termination rights essentially enable the derivative counterparty, i.e. the CME Group, to demand that the HOD and HOU ETFs exit certain futures contracts due to the risk that they won’t be able to cover obligations related to the futures contract. Horizons expects these termination rights to be exercised should certain forward contracts that the ETF’s hold sink to price levels blow $10 per barrel. The company also warned that the exposure to oil markets would be removed should the price of a contract hit negative territory.
If these rights were to be exercised, both HOD and HOU would be forced to convert the related contracts to a cash position and effectively remove its exposure to these long dated crude oil futures. This reduction in exposure could occur on any given day based on the volatility seen in the crude oil market, and Horizons anticipates that if such rights are exercised the ETF’s would lose 100% exposure to oil markets.
While the company has not seen the counterparty exercise such termination rights yet, it’s likely that there has been background discussion related to this event, given this mornings news release reminding investors of the risk. The company also warned that as a result of both HOD and HOU not issuing new subscriptions both ETF’s are trading nowhere near net asset value, and that new subscriptions are not expected to be issued until market volatility subsides.
The warning from Horizons follows the announcement that HOU will be conducting a 1 for 20 reverse split at the close of market on April 28, and that both HOU and HOD will be reducing their leverage to 1x versus the intended 2x.
The author has no securities or affiliations related to any organization mentioned. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.