ETF investors face highest risk as oil volatility batters energy funds
Crude futures seesaw between negative territory and recovery
Extreme volatility seen in oil price movements over the past week, as the coronavirus pandemic continues to severely hamper demand for the commodity, could lead to emergency measures for hard hit energy funds, but mass flows into oil ETFs may leave passive investors exposed to much greater risks.
WTI Crude futures dipped as far as $30 into negative territory for the first time in history early last week, largely due to reduced demand for the May contract and limited purchaser storing space, which was then followed by heavy falls in Brent Crude futures.
Prices recovered slightly later in the week, at least in part owing to renewed tensions between the White House and Iran, with Brent and WTI Crude futures trading at $21.80 and $15 per barrel (bl) respectively at time of publication.
The volatility has led to heavy losses across energy funds, which had already struggled amid historically low prices, with WTI Crude futures continuing to fall since they started the year trading at around $63.
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Schroder ISF Global Energy and TB Guinness Global Energy are the worst-hit year to date, down 54.6% and 45.2% respectively according to FE fundinfo.
Of the 11 funds identified in the IA universe as explicitly "energy" funds, just four have total AUMs of more than £100m as at 22 April.
Notably, the trend of ‘sustainable' investments outperforming ‘mainstream' counterparts, which has proliferated so far in this crisis, is borne out in the energy fund performance figures, as shown in the table above.
Head of personal investing at investment platform Willis Owen Adrian Lowcock warned soon after the price falls and if price weakness persists "we may see some emergency steps introduced to prevent a rout" on energy funds "purely exposed to the sector".
ETF investors flood into oil
Despite heavy losses for energy funds, investors have piled into oil ETFs in recent weeks. Retail investors alone poured almost £2bn into European ETFs explicitly investing in oil between 1 January and 22 April 2020, according to Morningstar estimates.
Portfolio manager at Franklin Equity Group Matt Adams explained that as large flows into oil ETFs have "supported prices in recent weeks", the WTI price in particular is "disconnected from physical oil prices on the ground".
WisdomTree forced to suspend oil ETP
Senior analyst, manager research specialising in passive strategies at Morningstar UK, Kenneth Lamont noted that with the oil price hitting $100bl as recently as August 2014, the price dislocation is "striking", which has not gone unnoticed by ETF investors.
However, he warned: "Investors in oil ETCs should beware. Buying cheap oil using an ETC may seem tempting, but the complexities and idiosyncrasies of the crude futures markets mean that you can lose money even if oil prices rise. For most investors, this approach is best left to specialists".
Despite the current popularity of exchange traded products investing in oil at present, WisdomTree was forced to close one of its products on Wednesday (22 April), owing to "extreme adverse moves in oil futures".
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