[Exclusive] The Disappearing Nickel Copper Bus ETN... Fears of Raw Material Nightmare Repeating "Fearless Retail Investors' Betting"

Exchange to Delist 'Daishin Inverse 2X Nickel Futures ETN(H)' Within This Week

[Asia Economy Reporters Lee Seon-ae and Lee Myung-hwan] In April 2020, a massive loss incident occurred involving exchange-traded notes (ETNs) based on West Texas Intermediate (WTI) crude oil futures. Due to the COVID-19 pandemic, international oil prices plummeted, and WTI prices fell below zero for the first time in history, causing the premium rate of leveraged ETNs that seek double returns on crude oil futures to soar close to 1000%. Related products were successively suspended from trading, and investors suffered losses amounting to hundreds of billions of won. This is known as the so-called ‘Crude Oil ETN Nightmare Incident.’

Concerns are growing about a recurrence of the commodity ETN nightmare. Amid soaring prices of commodities such as crude oil, nickel, and copper due to Russia’s invasion of Ukraine, individual investors are focusing on risky short bets. Moreover, there are indications that the impact could be even greater than the crude oil ETN loss incident. Although many crude oil ETN products faced delisting threats, they avoided delisting because the underlying index price did not close at zero, and trading resumed. However, due to the nickel price surge this year, the ‘Daishin Inverse 2X Nickel Futures ETN(H),’ which tracks nickel prices inversely at twice the rate, is expected to be delisted within this week.

According to the Korea Exchange on the 16th, the market capitalization of ‘Daishin Inverse 2X Nickel Futures ETN(H)’ before the trading suspension was 1.7 billion won, and the indicative value was 2.565 billion won. At the beginning of the year, the market cap of this product exceeded 5.6 billion won.

On the 7th, the London Metal Exchange (LME) nickel 3-month futures price closed up 66.25% from the previous trading day, and the underlying index, which tracks this price at -2x, fell to negative levels. The index provider S&P eventually set the closing price to zero. As a result, the underlying asset of ‘Daishin Inverse 2X Nickel Futures ETN(H)’ rose more than 50%, causing the closing price of the underlying index to become zero, and the indicative value to become zero. This is the first time in Korea that an ETN product’s underlying index value ended at zero. Daishin Securities plans to provide investor protection measures once the exchange decides on delisting, but there are practically no clear countermeasures. The exchange also concluded delisting because the indicative value cannot be restored. According to exchange regulations, ETN delisting does not occur solely due to temporary premium rate expansion, but delisting is possible if the price of the underlying asset or the index cannot be calculated. An exchange official stated, “After further confirmation regarding the index provider S&P’s handling of the underlying index, it may take some time, but regardless, since the indicative value has become zero, we plan to finalize the matter within this week.”

Since early February, when commodity prices began to rise sharply, individual investors have been betting on price declines in crude oil, nickel, copper, and others, requiring caution. From February 3, the first trading day of last month, to the 14th of this month, the net purchase amount of 11 inverse commodity ETN products by individuals totaled 90.91786 billion won. They bought 56.1661 billion won worth of the crude oil-based ‘Samsung Inverse 2X WTI Crude Oil Futures’ and 27.81042 billion won worth of ‘Shinhan Inverse 2X WTI Crude Oil Futures.’

They entered net purchases expecting a rebound in returns due to normalization of commodity prices following Russia’s troop withdrawal and judging the prices to be at a peak. The problem is that with the prolonged war, supply chain disruptions, and increasing economic sanctions in finance and trade by the international community, the likelihood of commodity prices calming down anytime soon is low.

The returns of the products with concentrated net purchases have already plummeted, and losses are snowballing. The average loss rate of 11 commodity-based ETN products (based on closing prices from February 3 to 14) including crude oil, copper, and nickel reached 26.04%. The ‘Daishin Inverse 2X Nickel Futures’ (leveraged inverse) that was suspended from trading on the 8th showed the highest decline rate. This product, which traded at 2,215 won on the 3rd of last month, fell to 850 won on the day before trading suspension, the 7th, showing a loss rate of 61.63%. During this period, individual net purchases amounted to 1.42892 billion won. The inverse product ‘Daishin Inverse Nickel Futures’ recorded a 40.81% loss between the 3rd of last month and the 14th.

Losses were also significant for crude oil-based inverse products. ‘QV Inverse Leverage WTI Crude Oil Futures’ and ‘Samsung Inverse 2X WTI Crude Oil Futures’ recorded losses of 39.58% and 35.85%, respectively. Others such as ▲Mirae Asset Inverse Crude Oil Futures Mixed (－24.32%) ▲Shinhan Inverse Brent Crude Oil Futures (－23.87%) also showed negative returns. The copper-based ‘Samsung Inverse 2X Copper Futures’ posted a 7.51% loss, followed by ‘KB Inverse 2X Copper Futures’ (－7.00%) and ‘Shinhan Inverse 2X Copper Futures’ (－5.80%).

Experts repeatedly urged caution in investing. Lee Jong-hyung, a researcher at Kiwoom Securities, said, “It is unlikely that the recently surged commodity prices will return to their original levels in the short term,” and “the upward pressure on prices will continue to increase at least until the third quarter.” Although international oil prices have recently shown a downward trend, Kim So-hyun, a researcher at Daishin Securities, pointed out, “To determine whether the international oil price is in a sustained downtrend, the Russia-Ukraine war must end or signals of declining oil demand must appear.”

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