WisdomTree has upgraded the index underlying its WisdomTree WTI Crude Oil ETC (CRUD LN), Europe’s largest and most liquid oil exchange-traded product.
Alexis Marinof, Head of Europe, WisdomTree.
The ETC now tracks the Bloomberg WTI Crude Oil Multi-Tenor Excess Return Index, which is an equal-weighted basket of three West Texas Intermediate crude oil futures contracts rebalanced on a monthly basis.
The move aims to make the $1.6bn ETC more resilient to future disruption in the oil market.
Oil market volatility has become a live concern for investors, regulators, and product providers alike following the events of April this year in which front-month West Texas Intermediate futures crashed into negative territory.
CRUD was spared from the worst of the carnage as its then-underlying Bloomberg Commodity Oil Subindex had rolled its exposure into a longer-dated contract a few days earlier.
However, the extreme conditions in energy markets during this period ultimately contributed to the closure of a number of oil ETCs (including some of WisdomTree’s smaller oil-related products) while others were forced to alter their strategies in a bid to survive.
Californa-based issuer United States Commodity Funds (USCF) was compelled to push out the futures exposure of its United States Oil Fund (USO US), the largest oil ETP globally, to as far out as June 2021 and expand the product’s mandate to include futures contracts for other types of oil and hydrocarbon fuel.
But the sponsor’s actions during this period have caused some controversy – it is facing a class-action lawsuit related to the management of USO during this period.
While oil markets have since stabilized with WTI futures trading near $40 per barrel since the beginning of June, this does not preclude a return to volatility. Analysts have highlighted the potential for a resurgence in Covid-19 infections to once again weigh heavily on crude prices.
WisdomTree’s decision to immunize the index against such volatility is in effect an attempt to future-proof CRUD.
New methodology
The new index has been created specifically through a collaboration between WisdomTree and Bloomberg.
It consists of an equal-weight basket of the three nearest-month WTI crude oil future contracts, rebalanced monthly.
The expiring contract will be rolled over at 20% increments over a five day period between the sixth and tenth business days of that month. The index will also be rebalanced to equal allocations of the three contracts during this period.
According to WisdomTree, the new methodology strikes a balance between helping to reduce rolling costs when oil futures are in contango while also staying exposed to the front of the curve where prices respond more strongly to market forces. The simulated correlation between the new index and the old index is 98.5% historically.
The index contains several additional features that help to further safeguard investors in the ETC. If the price of any oil futures contract falls below $10 per barrel, a Bloomberg committee will conduct an index review; if the price of any contract falls below $0, the index will conduct an immediate rebalance; and if the index reaches a price of zero, it will be terminated at zero immediately.
Alexis Marinof, Head of Europe, WisdomTree, commented, “CRUD is the largest and most liquid oil ETC in Europe, and WisdomTree is committed to ensuring that it provides the best oil investment experience in the industry. We have listened to investor feedback, working tirelessly with our partners to ensure CRUD is more robust than ever. We will continue to look at enhancing our product suite ensuring we offer the most comprehensive and robust range of energy ETCs for investors.”
Jarrett Lilien, President and COO, WisdomTree, added, “We have just experienced one of the most challenging market environments ever. Our team managed through it, and we remained true to our heritage, using it as an opportunity to innovate. The result is a best in class product designed to endure extreme market conditions, helping investors navigate the financial markets.”