Korean Regulator Warns of Wipeout Risk in Commodity ETPs
The Financial Supervisory Service (FSS) of South Korea is warning investors about the risks associated with commodity-linked exchange-traded products (ETPs). According to the FSS, these ETPs had a combined market value of 12.4 trillion won ($8.9 billion) as of November 11th, up 1.9% from the end of last year.
Crude oil ETPs accounted for 1.83 trillion won of that total, a 46.7% increase over the same period. The sharp rise in West Texas Intermediate (WTI) crude futures from $57.3 a barrel at the start of the year to $100 on November 11th contributed to this gain.
The concern is that leveraged and inverse products account for 37.4% of the market value of commodity ETPs, more than five times the average for all ETPs. This leaves investors heavily exposed to high-risk instruments. For crude oil and natural gas ETPs, leveraged and inverse products made up 88.4% and 93.6% of market value, respectively.
The FSS is urging investors to exercise caution due to the risks associated with these products. Commodity ETPs often draw short-term speculative money, which raises the likelihood of a divergence between market price and indicative value due to supply-demand imbalances.