7 ms·
> An exchange-traded fund has not and cannot trade below zero But why not, and is this baked into the contract? These aren't stocks, where the worst case is a
by 9nGQluzmnq3M 7y ago
> An exchange-traded fund has not and cannot trade below zero
But why not, and is this baked into the contract? These aren't stocks, where the worst case is a piece of useless paper: if there's no demand for oil, suddenly you're holding barrels of toxic waste with real storage costs, and it makes total sense to pay people to take them off your hands (as has already happened with short-term oil futures).
And the interesting thing is that it's actually in the fund's best interest to allow negative valuations, because that way they're not left holding the bag. I see lots of interesting litigation ahead...
- gruez 7y ago>And the interesting thing is that it's actually in the fund's best interest to allow negative valuations, because that way they're not left holding the bag Why would the fund care? They're a separate entity from the company managing the fund. If it goes negative with no hope of going back up, it will go into liquidation like any other company. The ones left holding the bag are the counterparties to those derivatives, not the investors or the company managing the fund.
- paxys 7y ago> if there's no demand for oil, suddenly you're holding barrels of toxic waste with real storage costs Thing is ETFs like USO are created specifically to not take physical delivery of the oil. It wouldn't hold any May expiring contracts by design, and is already shifting out its June contracts. If suddenly every single contract for July, August and beyond went negative, and the fund didn't have enough cash to weather it, it would declare bankruptcy. That doesn't actually need this specific situation to happen. For example buying a contract at $100 and selling at $50 would have the same net effect for the fund as buying at $20 and selling at -$30. There is no additional liability for the investors beyond the piece of paper they are holding (which is not a contract for oil delivery) becoming worthless, which is why zero is the hard floor.
- throwaway894345 7y agoWhat does that paper represent if not a contract for oil delivery? Presumably there's some real world oil backing it, and if so, where does that oil go?
- chapplap 7y agoThe piece of paper a USO investor holds is shares in the fund. The fund itself holds the futures that are contracts for oil delivery. Limited liability protects the fund's shareholders.
- throwaway894345 7y agoSo if the fund declares bankruptcy, who has to deal with the oil?
- manigandham 7y agoThe contracts will be liquidated first, if possible. If the fund is still left holding some then the exchange and market makers will absorb the losses with their excess capital and insurance policies. It takes special clearance to even trade contracts that are physically settled. Most of the time these contracts are just cash-settled instead.
- paxys 7y agoThink of it this way - if you owned a share of Microsoft stock, and Microsoft suddenly owed someone a trillion dollars, you personally wouldn't be on the hook to pay it.
- manigandham 7y agoYou own shares of the fund. Imagine it's like a company that makes a bad decision and loses all of its money. Maybe it ends up with debts greater than its assets. Either way, you as an investor lost the entire value of your shares which are now worthless, so $0 is as low as your investment can go. You're not responsible for paying any of the company's debts if they exist.
- tanderson92 7y agoEquity in a limited liability corporation incurs the holder no liability.
- elliekelly 7y agoThe fund isn’t structured as an LLC it’s a limited partnership.
- tanderson92 7y agoSame difference.
- elliekelly 7y agoNot for the general partner(s) who have unlimited liability for the entity’s obligations.
- beervirus 7y agoIf I own shares of an ETF that suddenly has net negative asset value, are they going to send me a bill like a margin call? Good luck with that.