ETF betting on oil price drop collapses

The sharp rise in the price of oil, which surpassed $110 a barrel yesterday (and has since fallen back somewhat) has caused havoc among investors who had hoped to make a profit out of a fall in the price.

There are leveraged ETFs on the Tel Aviv Stock Exchange that enable investors to gain from a fall in the price of an underlying asset, through a put or a short position, but the sharp rise in the price of oil has turned this strategy into painful losses on ETFs for which oil is the underlying asset.

Yesterday, the Tel Aviv Stock Exchange halted trading in the KSM ETF Leveraged Short Bloomberg Brent Crude Futures x2 Monthly. The ETF was meant to provide a return of double the decline in the Bloomberg index tracking the price of a barrel of Brent crude. If the index rises, however, the ETF incurs a loss of double the rise. The ETF does not manage a large volume of assets – something over NIS 1 million – but following the jump in the price of oil its price tumbled by some 47% in a week. KSM, part of Phoenix Financial (TASE: PHOE), is headed by Avner Hadad, who is CEO of Phoenix Investment House.

The fund is rebalanced monthly to maintain an exposure of minus 200% to the underlying asset, but its prospectus states that if the benchmark price of oil changes by more than 15% on any one day, the fund manager must carry out a rebalancing, even if the end of the month has not been reached. The last rebalancing was carried out on February 26, before the war with Iran, and the consequent rise in the price of oil, began. On March 5, the Bloomberg benchmark rose by more than 15%, and so a rebalancing was carried out that day. The rise in the oil price continued, however. “As a result of the war in Iran an extraordinary macro-economic event happened that included a sharp rise in the price of oil, such that the movement in the benchmark on Friday (March 6) was 8.53%,” Kesem stated.

“In the course of the current session (Monday) the trend worsened, and thee benchmark continued to rise, by 12%. As a result, the cumulative movement in the benchmark from the last rebalancing date to the opening of trading on the Tel Aviv Stock Exchange today is some 50%, which means that the fund has a negative value.”

The fund manager therefore requested the Tel Aviv Stock Exchange and the Israel Securities Authority to halt trading in the ETF.

Kesem said that it was examining the possibility of liquidating the fund because of the extreme volatility arising from the war in Iran.