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The Samsung (KS:005930) S&P GSCI Crude Oil ER Futures ETF, which held more than $500 million worth of the derivatives as of April 20, lost nearly half its value in Hong Kong on Wednesday. The 45% slump to HK$1.82 was both the biggest decline and the lowest level since trading began in May 2016.
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Samsung Asset Management (Hong Kong) Ltd, which manages the fund, said in a Tuesday exchange filing that the fund will sell its entire holdings of June oil contracts and buy September contracts. It also warned that in a “worst case scenario,” the net asset value of the fund may drop to zero and investors may suffer “a total loss” of their investments.
“There is a big tracking error after the ETF switches from tracking June futures to September futures,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong. “After the switch, the value of the ETF evaporates by more than half because of the plunge in oil futures.”
In the U.S., the United States Oil Fund (NYSE:USO), the biggest ETF tracking crude prices, took a series of unusual actions after losing a third of its value in two days. It had to suspend the issuance of new shares, an action that could leave it untethered from prices it’s supposed to track.
ETFs are being rattled because of a quirk in the main U.S. oil benchmark, West Texas Intermediate futures, which requires anyone holding contracts after they expire to be able to take delivery of crude in the oil hub of Cushing, Oklahoma.
Storage tanks there could be completely full by May because of unprecedented lockdown measures to slow the spread of the coronavirus, which have decimated fuel demand. With fewer people able to buy crude and store it, liquidity in near-term contracts could dry up and create squeezes like Monday, when U.S. futures fell to as low as minus $40 a barrel. So ETFs are spreading their exposure into further-out contracts.
(Updates with analyst comment in fourth paragraph and background in sixth paragraph.)
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