Investors Flock to Highly Risky Crude Oil ETNs, ETFs

Despite an unprecedented plunge in international oil prices, a growing number of individual investors are rushing to invest in crude oil products, turning the market into a hot place for speculators. Eventually, Korea Exchange warned investors of the high risk of leveraged crude oil investment products which are highly speculative in nature.

The trading amount of crude oil ETNs and ETFs reached 1,198.4 billion won on April 22, hitting a new record high following the previous day. These products were traded at unusually high prices compared to their actual values. On April 21, the trade volume soared 60 percent from the previous day to 1,033.3 billion won. Leveraged crude oil products are highly risky as investors could lose their entire principal if international oil prices drop by more than 50 percent. Financial investment companies and the exchange issued warnings to no avail.

On the morning of April 22 (the Korean Standard Time), Western Texas Intermediate (WTI) for June delivery dropped 43.4 percent (US$8.86) from the previous day to US$11.57 per barrel at the New York Mercantile Exchange (NYMEX).

Crude oil ETNs and ETFs soared as investors swarmed to bet on oil prices’ rebounds and declines at the same time. On this day, Shinhan Leverage WTI Crude Oil Futures ETN closed at 650 won, which was more than 10 times its normal value of 63.02 won. In the previous day, the gap between the prices was 60 percent. Industry insiders said investors have gone insane.

In the case of crude oil ETFs, a limit in price changes pushed up trading prices higher than their actual ones. The KODEX WTI Crude Oil Futures (H) fell 30 percent, the limit but this is less than a 40 percent drop in oil prices. As a result, the gap between them expanded to 37 percent. Nevertheless, individual investors’ purchases continued on that day, and the trade volume stood at a total of 435.1 billion won.

As price distortions became so rampant, the Korea Exchange announced that it would suspend the trading of two leveraged ETN stocks (Shinhan Leverag WTI Crude Oil Futures ETN (H) and Mirae Asset Leverag Crude Oil Futures Mixed ETN (H)) for two days from the April 23.

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