S&L ETPs Protection mechanisms to mitigate risks
Short and Leveraged Exchange Traded Products (“S&L ETPs”) can be used in a large spectrum of market scenarios to help investors achieve a wide range of investment goals. However, while powerful and versatile, S&L ETPs are complex instruments that bear high risk. This risk is particularly exacerbated in period of high volatility. This extra risk stems from the way they are structured to provide the leverage that.
To help safeguard investors, WisdomTree S&L ETPs include protection mechanisms to mitigate risks in highly volatile days. The main protection mechanism, Intraday Restrike, is designed to minimize the chance of an S&L ETP going to zero. It does so by resetting the leverage during the day when the underlying asset of the ETP has touched a certain threshold.
Additionally, 3 new protection mechanisms have been introduced and are applicable to the products below:
- The Overnight Restrike
- The Near Zero Price Mechanism
- The Discretionary Index Change mechanism
The Overnight Restrike is similar to the Intraday Restrike but applied outside Standard Trading Hours for the underlying asset of the ETP.
ETP Name | Standard Trading Hours |
---|---|
WisdomTree Natural Gas 3x Daily Short | 5:00 – 14:30 New York Time |
WisdomTree WTI Crude Oil Pre-roll |
5:00 – 14:30 New York Time |
WisdomTree WTI Crude Oil 3x Daily Leveraged | |
WisdomTree WTI Crude Oil 3x Daily Short | |
WisdomTree Brent Crude Oil Pre-roll | 9:00 – 19:30 London Time |
WisdomTree Brent Crude Oil 3x Daily Short | |
WisdomTree Brent Crude Oil 3x Daily Leveraged |
Combined with the Intraday Restrike, it allows the product to restrike around the clock, thus minimizing the chance of an S&L ETP going to zero and losing all of its value.
The Near Zero Price Mechanism introduces the ability to change the underlying index of the product for a short notice if the price of the underlying asset gets too close to zero. The new index (the “Roll Index”) would remain similar to the current index and provide exposure to the same commodity but using a different contract.
A good illustration of when this mechanism can be useful is to look at what happened earlier this year in WTI Crude Oil. Between the 13th and the 20th April 2020, the WTI Crude Oil May future contract price dropped from 22.4$ to -39.6$. At the same time, the next WTI Crude Oil future contract, i.e. the June contract only moved from 29.26$ to 20.43$. Under such circumstances, and assuming the S&L ETPs were tracking the May contract initially, this mechanism would allow the product to switch at short notice to the June contract.
If the relevant future contract i.e. the one tracked by the ETP breaches a given threshold (the “Near Zero Price Roll Threshold”), then at the end of that day, the index can be changed to the Roll Index.
ETP Name | Near Zero Price Roll Threshold | Roll Index Name | Roll Index RIC |
---|---|---|---|
WisdomTree Natural Gas 3x Daily Short | 1.25 USD/MMBtu | Solactive Natural Gas 3M Commodity Futures Index | .SOLWTNG3 |
WisdomTree Bloomberg WTI Crude Oil | 15 USD/bbl | Solactive WTI Crude Oil 3M Commodity Futures Index | .SOLWTCL3 |
WisdomTree WTI Crude Oil 3x Daily Leveraged | |||
WisdomTree WTI Crude Oil 3x Daily Short | |||
WisdomTree Bloomberg Brent Crude Oil | 15 USD/bbl | Solactive Brent Crude Oil 3M Commodity Futures Index | .SOLWTCO3 |
WisdomTree Brent Crude Oil 3x Daily Short | |||
WisdomTree Brent Crude Oil 3x Daily Leveraged |
* MMBTU - Stands for one million British Thermal Units (BTU). A BTU is a measure of the energy content in fuel, and is is used in the power, steam generation, heating and air conditioning industries. One BTU is equivalent to1.06 Joules.
* bbl - These 42-gallon crude barrels were painted in blue and called blue barrels, and abbreviated as "bbl", guaranteeing a buyer that it was 42-gallon barrel of crude.
Lastly, the Discretionary Index Change mechanism allows WisdomTree to change the underlying index of the ETP with 5 business days’ notice as long as the new index is very similar to the current index (i.e. provides exposure to the same commodity but on a different future contract). This mechanism allows the product to keep abreast of ever-changing market dynamics, especially when there are acute structural issues affecting normal functioning of the relevant markets. This was especially evident during the recent oil crisis where negative oil prices in the futures market were precipitated by a lack of storage for WTI crude.
More information about these mechanisms, as well as important things to keep an eye on in normal market conditions can be found in our two guides “7 things to remember when investing in S&L ETPs” and “6 ways volatility increase risks for Short and Leveraged ETPs Investors”.
The exact details for each product can be found in the prospectus and final terms.