December 9, 2016 / 8:34 PM / 8 months ago

Investors in delisted oil ETNs sell, but at a price

NEW YORK, Dec 9 (Reuters) - Investors are paying a price for not finding buyers for popular exchange-traded notes (ETN), used to bet on oil prices, that delisted from U.S. exchanges this week.

Credit Suisse's VelocityShares 3x Long Crude Oil ETN (UWTI) became the largest product of its kind delisted from U.S. exchanges after trading Thursday. VelocityShares 3x Inverse Crude Oil ETN also delisted.

The notes promise to magnify or deliver the opposite of oil price gains, allowing investors to book huge profits when oil prices rise or fall but also creating the potential for massive losses. Despite their complexity, the notes are widely used by individual retail investors.

But Credit Suisse delisted the notes without offering a new redemption option for investors who retained them, raising the prospect that investors who did not sell the notes could be stuck in the products, which do not officially expire until 2032, Reuters reported this week.

"It's ultimately buyer beware," said ETF.com Chief Executive Officer Dave Nadig, who sold 10 UWTI notes Friday. "Investors end up in this weird information gap."

Now, the products, which have an outstanding value of $745 million, live on in a netherworld of over-the-counter trading.

Some investors appear to be paying a steep price to exit, with some UWTI notes selling for more than 10 percent of a discount to the note's estimated intraday value, according to Thomson Reuters data. Three million notes changed hands Friday.

Unless Credit Suisse offers a new redemption option, investors need at least 25,000 ETNs to get their cash back from the issuer.

The speculators buying the notes are taking a risk that they will not get enough shares to redeem, but the trades show they could turn a profit if the trade works out, Nadig said.

Credit Suisse declined to comment. VelocityShares, a Janus Capital Group Inc unit that provides services for the notes, could not immediately be reached for comment.

Credit Suisse said in a Nov. 16 statement it would delist the ETN to better align its products with "its broader strategic growth plans."

VelocityShares said late Thursday it was launching two new ETNs - backed by Citigroup - as an alternative to the existing product.

Investors hold $22 billion of U.S. ETNs which constitute a pledge by an issuer. Payouts are based on the performance of the underlying asset, but the notes do not "hold" those assets, unlike ETFs to which they are often compared. (Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Grant McCool)

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