Korean Regulator Warns on Leveraged Oil ETP Risks

The Financial Supervisory Service (FSS) in South Korea has warned retail investors about the risks of leveraged oil exchange-traded products (ETPs), which have surged in popularity.

Commodity ETPs saw a market capitalization of 12.407 trillion won as of November 11, up 1.9% from last year's end. Oil ETPs accounted for 2.682 trillion won, a 46.7% increase from the previous year.

The problem lies in the high share of leveraged and inverse products among commodity ETPs. Leveraged and inverse products make up 37.4% of the total market capitalization, with oil ETPs being 88.4% leveraged or inverse and natural gas ETPs at 93.6%. Silver ETPs have 41.3% of leveraged or inverse products.

With commodity prices experiencing sharp swings, recent price fluctuations increase loss risks for retail investors. Oil futures saw a jump of 97% to $113 per barrel before plummeting 39% to $68.6, only to rise again by 46% to $100 on November 11. Similar price volatility was seen in gold and silver.

The FSS presented an example where a 2x leveraged ETP returned just 0.2% when WTI prices alternated up and down over three days for a cumulative return of 1.3%. Conversely, the -2x inverse leveraged ETP posted a -10.1% return.

Investors are also advised to watch tracking error, as 68.2% of oil ETPs and 66.7% of silver ETPs have a maximum tracking error above 5%. ETNs can be delisted if their indicative value falls below 1,000 won.