FINRA Issues Cautionary Guidance Concerning Volatile Oil-Linked Exchange-Traded Products (ETPs)

Investors solicited by their stockbroker or financial advisor to invest in oil-linked financial products may have claims to recover their losses through FINRA arbitration, or in some instances, litigation. Recently, in light of extreme commodity volatility in the oil and gas sector, as the price of West Texas Intermediate (WTI) crude oil went negative for the first time in April 2020, some retail investors have suffered outsized losses on certain energy investments. 

Accordingly, FINRA has recently issued comprehensive guidance concerning the sales practice obligations of financial advisors who recommend investments in certain exchange-traded products (ETPs) offering exposure to the oil market. In the guidance, FINRA recognizes that “the performance of such products may be linked to unfamiliar indices or reference benchmarks, making them difficult for the average investor to comprehend.” 

Because investing directly in oil is impractical for many investors, commodity-linked ETPs are typically structured to track commodity futures or futures indices, as opposed to the underlying spot commodity. Commodity-linked ETPs, including those linked to oil and natural gas, may come in the form of exchange-traded notes (ETNs) or commodity pools. In either case, ETNs and commodity pools are extremely complex and have unique risk components that may not be readily understood by retail investors. In fact, FINRA has cautioned that experience with similar products “suggests that some retail investors and investment professionals recommending oil-linked ETPs, including commodity pools and ETNs, may have mistakenly thought that these ETPs are a proxy for the spot price of oil, when in fact their investment objectives are to track oil futures contracts.” 

In addition to the complexity and risk associated with oil-linked ETPs structured to track oil futures contracts, investors and investment professionals should also be mindful of other potential risks, including the use of leverage and/or an inverse approach. With respect to leveraged oil-linked ETPs, these products are designed to only be held for a short-term basis, primarily due to their potential for extreme pricing volatility. 

As Covid-19 lockdowns have severely disrupted the demand for energy, many commodity-linked ETPs have sustained losses. In fact, due to extreme pricing volatility, at least one oil-linked ETP—ProShares UltraPro 3x Crude Oil ETF (OILU)—has liquidated altogether. In addition, the following oil and gas ETPs have suffered considerable losses (with year-to-date returns as of the time of this writing): 

• UWT VelocityShares 3X Long Crude Oil ETNs -99%

• GASL Direxion Daily Natural Gas Bull 3x Shares -99%

• WTIU UBS ETRACS-ProShares Daily 3x Long Crude ETN -98%

• GUSH Direxion Daily S&P Oil & Gas Bull 2x Shares -98%

• UCO ProShares Ultra Bloomberg Crude Oil -95% 

• DRIP Direxion Daily S&P Oil & Gas Bear 2x Shares -89%

• OILX UBS ETRACS S&P GSCI Crude Oil Total Return ETF -84%

• USO United States Oil Fund -72%

• OILK ProShares K-1 Free Crude Oil Strategy ETF -66%

• OLEM iPath Pure Beta Crude Oil ETN -35%

• USL United States 12 Month Oil Fund -34%

• DBO Invesco DB Oil Fund -32%

With respect to commodity-linked ETPs, a broker or financial advisor should be capable of explaining to an investor the product’s main features and associated risks. While an oil-linked ETP may be appropriate for an experienced customer with a speculative investment objective, the same product might not be suitable for a less experienced investor, or a customer with a more conservative investment profile. 

The attorneys at Giarrusso Law Group LLC have extensive experience with complex oil and gas investments, including financial products linked to commodity futures contracts. Investors may pursue a claim to recover losses through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.