Samsung’s $626 Million Oil ETF Alters Index After Rally Miss
7/7/2020 4:10:55 PM
(Bloomberg) -

Samsung (KS:005930) Asset Management Hong Kong Ltd. is changing the underlying benchmark for its oil ETF after it was unable to track the current index following a dramatic sell-off and subsequent rally in crude prices this year.

Samsung Asset said it worked with S&P Dow Jones Indices to come up with a new index that will track multiple contract months for oil futures to mitigate the risk from holding a single-month contract, the Hong Kong-based money manager said in a statement late Monday.

Once the new U.S. dollar index is rolled out in August, it will eventually be weighted 55% to the one-month forward index, 30% to the two-month index and 15% to the three-month, according to the statement. The ETF fell 1.6% in Hong Kong trading on Tuesday.

The Samsung exchange-traded fund has trailed its underlying index since May, after investors poured into it to bet on a rebound in oil prices after the April plunge. The ETF’s money pool jumped 84 times to $626 million as of July 3, making it the fastest-growing money manager in Hong Kong, according to data compiled by Bloomberg.

For those who bought the fund -- the Samsung S&P GSCI Crude Oil ER Futures ETF -- in April, their timing looked to be impeccable. Oil futures plunged to -$40 in New York on April 20, as the pandemic and price war between Russia and Saudi Arabia sent the market into freefall. The spot price for West Texas Intermediate has literally turned upside down since then, rallying to about $40 a barrel.

Samsung was unable to track the recovery because its broker didn’t allow the fund to increase its exposure to oil futures. The fund didn’t name the broker. As a result, Samsung’s managers sold out of the active June contract and bought contracts for September, later adding ones for October and December. The September contracts were priced higher than those for June, meaning the fund held fewer of them, reducing their exposure to the ensuing rally.

In a letter to shareholders dated April 21, amid the heightened market panic, Samsung explained its move.

“Over the course of the past day, the price of June 2020 contracts has dropped substantially,” the fund wrote, adding it could drop to zero or negative.

The fund said it was taking a “defensive position” to protect investors by selling the contracts in these “exceptional circumstances.”

It acknowledged the trade-off for the move: “The downside is that investors may not be able to enjoy any upside of holding June 2020 contracts” if the market price rebounds.

That’s exactly what happened. As a result, the fund has posted a decline of 78% this year as of July 2, compared with a 66% drop in the index it tracks. The fund appointed several clearing brokers in May.

Unprecedented oil-market volatility this year has wreaked havoc on ETFs and other products designed to give investors an easy way to bet on the direction of crude prices. The Samsung ETF and the U.S. Oil Fund, which trades in New York, are among those that upended their strategies to reduce the risk of getting wiped out by another plunge below zero.

Bank of China Ltd. faced a public outcry and scrutiny over the collapse of an investment product linked to oil futures, and is facing the possibility of absorbing $1 billion in losses suffered by its retail clients.

In South Korea, mom-and-pop investors exposed to about 1.45 trillion won ($1.2 billion) worth of structured notes tied to Brent or WTI futures faced losses. In India at least three brokerages have petitioned the courts to challenge the settlement of contracts after their clients faced millions of dollars in losses from the negative prices.