To delist or not to delist?
When it comes to exchange-traded notes, some say the move — which involved pulling a product from its designated exchanges — shouldn’t even be allowed.
One member of that camp is Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, who told CNBC’s “ETF Edge” on Monday that a recent wave of delistings was nothing short of “unadulterated avarice.”
Credit Suisse announced in June that it would delist nearly half of its VelocityShares-branded products, including the popular VelocityShares Daily 2x VIX Short Term ETN (TVIX), which some traders used to bet on volatility.
Last week, one of those ETNs — the VelocityShares 3x Inverse Natural Gas ETN (DGAZF) — exploded in the over-the-counter markets, its price soaring from $400 to as high as $24,000 a share. Possible explanations so far include out-of-control algorithms and market manipulation, though analysts find it unlikely that retail traders caused the surge as many have limited-to-no access to that corner of the market.
On Aug. 12, Credit Suisse said it would be close DGAZF completely at the end of the month and that investors would get fair value in return.
“This is a problem for the industry and for investors,” Nadig told CNBC. “Instead of just shutting the products down, they closed them for new money and then delisted them, meaning they took them from NYSE or Nasdaq or Cboe where they were and they pushed them into the pink sheets. What happens then is all the volume dries up because it’s the pink sheets. Many investors can’t even trade on the pink sheets. And yet these funds still have, in some cases, hundreds of millions of dollars trapped inside them and investors really don’t have much of a way to get out.”
While most of those leveraged ETNs were held mainly by institutions, there are some retail investors still trapped in those delisted products, Nadig said, citing his email inbox as evidence.
“What this means is you’ve got to pay attention and know what you own and why you own it and not get caught blindsided when somebody decides they want to delist a product,” he said.
The bigger problem lies with the issuers, however, Nadig said.
“This is just unadulterated avarice on the part of Credit Suisse,” the CIO said. “They are keeping them open so that they can continue to collect their fee, or in this case reduce their liability, as these products wind down. It should be criminal. It should literally not be allowed because it is incredibly anti-consumer. It just hurts investors. There’s no reason for this other than the greed of the issuer.”
Chris Hempstead, director of institutional business development at IndexIQ, agreed that delistings seem mainly motivated by fees, saying that for an issuer, going straight to liquidation would mean getting “orphaned at the bank.”
Additionally, unlike ETFs, “these exchange-traded notes don’t have a board, so there really isn’t this oversight committee to sort of look over those things,” Hempstead said in the same “ETF Edge” interview.
“These banks are very accustomed and familiar with creating custom products and custom strategies for their institutional and for their high-net-worth clients,” he said. “[With] these exchange-traded notes, they’re like, ‘Hey, look: why don’t we just do the same kind of thing and put it out there and see what happens?’ But then they get left without anyone really to account for it, and … once that vehicle goes away, they lose the efficiency that we’re accustomed to in exchange-traded products, which is a very dangerous thing.”
Credit Suisse declined CNBC’s request for comment.
