Last Friday (May 2, 2014), ProShares announced the suspension of creation units for eleven ETFs. The ability to create and redeem shares is the primary characteristic of what makes an ETF an ETF. Without the ability to create new shares, there is not a method to keep the trading price aligned with the underlying net asset value. By definition, they become broken products.
Unfortunately, regulators have not taken any steps to notify or warn investors about broken products. The simplest way would appear to be adding a suffix to the ticker symbol. This would prevent trades from being placed using the unaltered ticker symbol, and investors would discover the broken conditions by way of the revised ticker symbol.
Broken products essentially become closed-end funds where price premiums (and sometimes discounts) can develop. This is not a problem for actual closed-end funds, as investors have been taught to expect these events. However, this is extremely troublesome with ETFs and ETNs because investors are conditioned to believe it cannot happen. In the most extreme case on record, a 1,000% premium developed in ELEMENTS MLCX Gold ETN (former ticker GOE) when creations were halted and investors were not informed. Investors were severely burned when the premium evaporated.
Although regulators have failed to address this, ProShares is trying to warn investors and traders. The firm’s press release highlights some of the risks involved with broken products. The suspension of creation units is the result of delays in the effective date of a registration statement amendment and approval by the National Futures Association. Additionally, ProShares believes the suspensions are temporary and expect to announce the resumption of creating shares soon.
The eleven affected ETFs hold futures contracts and are:
- ProShares Ultra DJ-UBS Commodity (UCD)
- ProShares UltraShort DJ-UBS Commodity (CMD)
- ProShares Ultra DJ-UBS Natural Gas (BOIL)
- ProShares UltraShort DJ-UBS Natural Gas (KOLD)
- ProShares Ultra Australian Dollar (GDAY)
- ProShares UltraShort Australian Dollar (CROC)
- ProShares Ultra Euro (ULE)
- ProShares Short Euro (EUFX)
- ProShares Ultra Yen (YCL)
- ProShares Short VIX Short-Term Futures ETF (SVXY)
- ProShares VIX Mid-Term Futures ETF (VIXM)
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.