The Speculative Oil Derivatives Market... What Exactly Are Oil Derivative Products?

[Asia Economy Reporter Koo Eun-mo] As international oil prices experience an unprecedented decline, individual investors hoping for a rebound in oil prices are overheating their investments in derivatives such as exchange-traded notes (ETNs) and exchange-traded funds (ETFs) based on crude oil as the underlying asset. Experts emphasize that since commodity-related products like crude oil are high-risk products requiring a deep understanding of futures, investors should carefully examine various investment risks rather than simply investing with the expectation of a price rebound.

The initial issue with oil-related products was highlighted due to the divergence rate in trading prices. The divergence rate of ETNs and ETFs is an investment risk indicator expressed as the ratio between the market price and the actual value of the underlying asset. Recently, following the sharp drop in international oil prices, a buying frenzy has caused this divergence to abnormally widen. A widening divergence rate means that investors are more likely to buy or sell the investment asset at prices higher or lower than its actual value.

Price divergence in ETNs and ETFs can occur when a particular product becomes popular in the market, increasing demand while supply fails to keep up. For ETNs, when demand rises, additional listings are made to supply more units so that trading prices can align closely with the index value. However, if this additional listing is not conducted swiftly and smoothly, there is a risk of price distortion, and such a situation is currently occurring in the domestic market.

According to the Korea Exchange on the 23rd, the divergence rate of the Shinhan Leverage WTI Crude Oil Futures ETN(H), which closed at 650 won the previous day, reached 771%. Although the stock price fell by 28.18% compared to the previous trading day, the actual value per share plummeted to 74.60 won, about one-seventh of the previous day's closing value of 562.41 won. The Mirae Asset Leverage Crude Oil Futures Mixed ETN(H) also closed at 1,600 won, down 35.2% from the previous day, but its actual value was 577.04 won, resulting in a divergence rate of 177%.

While the domestic ETN market is institutionally supported to allow additional listings without restrictions, only securities firms can issue additional units, so these risks cannot be completely eliminated. On the other hand, ETFs can increase the number of issued securities through a procedure called fund creation by multiple designated participants, so the risk of price divergence due to delays in additional listings is relatively lower.

A Korea Exchange official stated, "When the divergence rate exceeds a certain level, we notify investors of the risks through disclosures," but also pointed out, "It is important for investors to be fully aware that price divergence can occur when investing."

Regarding leverage and inverse products, which have recently attracted individual investors' interest in the oil market, it is necessary to understand them properly before investing. Leverage products can yield higher returns when the price of the underlying asset rises, but they are high-risk products that can also amplify losses if the asset price falls contrary to expectations. Leverage products linked to twice the daily price change and inverse products linked to the negative daily price change have been continuously listed since 2009 to meet diverse investment demands.

Investors should particularly note that the investment period of leverage and inverse products being one month does not mean they track twice, negative once, or negative twice the price increase of the underlying asset over that period. Instead, they aim only to achieve twice, negative once, or negative twice the daily return. Misunderstanding this characteristic may lead investors to mistakenly believe that the products guarantee the return over their investment period, which can cause them to perceive problems with the products.

Experts urge that commodity-related derivatives, including crude oil, are higher-risk products compared to general equity products, so understanding related investment indicators is essential before investing. Jung Sung-in, head of the ETF Strategy Team at Korea Investment Trust Management, said, "Most commodity investments, including crude oil, involve futures, which even institutional investors find difficult and risky. Approaching these products solely from a price perspective is very dangerous, and investment is recommended only for investors who have the understanding to judge whether the current price is cheap or expensive."

Another industry insider advised, "Since oil investments are in futures rather than physical commodities, it is important to accurately understand the characteristics of futures. Especially, except for precious metals, all commodity futures differ from financial futures in that arbitrage is almost impossible, causing price differences between spot and futures markets. Understanding this mechanism is very important when investing."

This content was produced with the assistance of AI translation services.