FSS Warns on Commodity ETP Risks Amid Middle East Tensions
The Financial Supervisory Service (FSS) in South Korea has issued a warning to investors about the rising risks associated with commodity exchange-traded products (ETPs). The regulator notes that short-term speculative funds are flowing into the commodity ETP market, increasing the risk of losses.
As geopolitical tensions in the Middle East escalate and commodity prices swing sharply, the FSS is concerned about the dominance of high-risk leveraged and inverse products. According to the FSS, as of September 11, leveraged and inverse products accounted for 37.4% of total market capitalization of commodity ETPs, which stood at 12.4 trillion won (approximately $9.14 billion).
The biggest concern is that these high-risk products are concentrated in crude oil and natural gas ETPs. Leveraged and inverse products account for 88.4% of crude oil ETPs and 93.6% of natural gas ETPs, meaning that the vast majority of assets in these products are invested in speculative instruments.
The FSS warns that these high-risk products can generate a 'negative compounding effect' when prices repeatedly rise and fall, causing cumulative returns to lag behind those of the underlying asset. In one case, an investor who purchased an inverse leveraged product suffered a 24% loss in a single day after prices unexpectedly rose.
The FSS will continue monitoring unusual activity in commodity ETPs, including trading volumes and premium/discount ratios. If it determines that investor risks are increasing further amid heightened geopolitical tensions, the regulator plans to take proactive measures, including issuing additional consumer alerts.