Millennials Are Using One of the Riskiest ETFs to Speculate on Oil
Perhaps millennials should just stick to investing in index funds—or at least the exchange-traded funds that their robo-advisers put them in.
According to research from online brokerage TD Ameritrade Holding Corporation, one particularly risky ETF is attracting the millennial demographic far more than other age groups. In fact, it was one of the top 10 stocks traded by millennials in 2015.
The VelocityShares Daily 3x Long Crude ETN (UWTI) isn’t just a risky product; it is arguably the most dangerous ETF on planet Earth. First off, it is triple leveraged, which makes it extremely volatile—nearly 10 times more jumpy than the S&P 500 Index and more than double any of the other stocks on the list. The leverage amount in UWTI also gets reset each day, which can make for some epic days when oil does go up but over time causes returns to corrode.
"The words 'investors' and '3X leveraged' should never appear in the same sentence," says Josh Brown, chief executive officer of Ritholtz Capital Management. "Anyone who thinks they're getting an exact 3-for-1 exposure to crude for more than a single 24-hour period in this fund is like a wacko from Disneyland."
In addition, it suffers from roll costs that come from tracking front-month oil futures. Throw in the bad run oil has had recently, and you get a lifetime return of -99.61 percent, as seen in the chart below.
On top of all that, UWTI comes with credit risk. It is also an ETN (an exchange-trade note), which is basically an unsecured debt obligation. While ETN defaults have been nearly nonexistent, it is an added risk that investors may not be aware of. In summary, UWTI is the rare case in which leverage, roll costs, and credit risk all exist in one product.
So why are millennials drawn to such a product? "The millennials investing in this ETF might view it as play money," said David Schawel, portfolio manager at New River Investments. "I think the people buying that are just speculating." Of course, the younger the investor is, the more room there is essentially to gamble on risky bets such as UWTI.
Some of the data back up Schawel's take. While UWTI was fifth on the list of stocks millennials were buying, it was also fourth on the list of stocks they were selling. This means they weren't buying it to hold for the long term and were more likely to be placing speculative bets on short-term moves. Other stocks that made TD's top 10 list were far less risky and were popular among older demographics as well. These included Apple Inc., Netflix Inc., and Amazon.com Inc.