[Edaily Reporter PARK MIN ] As volatility in the prices of energy (crude oil, natural gas, etc.) and metals (gold, silver, etc.) has intensified due to escalating geopolitical risks in the Middle East, the Financial Supervisory Service has urged investors to exercise extreme caution when investing in commodity exchange-traded products (ETPs). The warning comes amid concerns that large-scale investment losses could occur due to a concentration of investors in high-risk leveraged and inverse products aimed at short-term gains, as well as the widening of abnormal price discrepancies.

According to the Financial Supervisory Service on the 22nd, the market capitalization of commodity ETPs stood at 12.407 trillion won as of the 11th, up 1.9% (231 billion won) from the end of last year (12.176 trillion won). ETPs are products that use specific indices, commodities, bonds, or exchange rates as underlying assets and pay returns based on price movements; the term encompasses both exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

By commodity category, crude oil ETPs saw the sharpest growth. The market capitalization of crude oil ETPs surged by 46.7% (854 billion won), rising from 1.828 trillion won at the end of last year to 2.682 trillion won on the 11th. This was driven by a massive influx of funds seeking short-term profits as oil price volatility widened due to the prolonged conflict between the U.S. and Iran.

Above all, price volatility across the entire commodities market has also intensified. West Texas Intermediate (WTI) crude oil futures prices surged 97% this year, rising from $57.30 per barrel in January to $113 in April, before falling 39% to $68.60 in July and then rebounding to the $100 mark this month. During the same period, natural gas prices soared 92% from $3.62 per MMBtu (million British thermal units) on January 2 to $6.96 in just 27 days, then plummeted 64% to $2.52 in April, before rising 15% to $2.90 as of the 1st of this month. Gold and silver futures prices have also been fluctuating sharply by tens of percent compared to the start of the year.

The problem lies in the influx of funds into high-risk leveraged (2x) and inverse leveraged (-2x) products, which track twice the price fluctuations of the underlying assets. Leveraged and inverse products accounted for 4.635 trillion won, or 37.4%, of the total market capitalization of commodity ETPs—nearly five times the average for all ETPs (7.4%). In particular, leveraged and inverse products made up the vast majority of natural gas and crude oil ETPs, at 93.6% and 88.4%, respectively.

The Financial Supervisory Service (FSS) warned of the risk of principal loss due to the “negative compounding effect” inherent in such derivatives. Due to the product structure—which tracks the daily return of the underlying index twice as much in either a positive or negative direction—profits are amplified when the direction is correct, but losses are also magnified by a factor of two when the direction is wrong. In particular, when the underlying asset fluctuates up and down without a clear trend, the cumulative return falls significantly short of the underlying asset’s return, gradually eroding the account balance.

In fact, during the period when WTI futures rose slightly by 1.3% after fluctuating (March 5–10), the return on 2x leverage products was only 0.2%, while inverse (-1x) and inverse leverage (-2x) products recorded losses of -3.8% and -10.1%, respectively.

The widening of the “price-to-net-asset-value spread” caused by the inflow of speculative funds is also a risk factor. If an investor buys when the market price significantly exceeds the actual net asset value (index value), they will bear the full loss equal to the spread as the price converges toward its normal value. Over the past three months, the proportion of products with a maximum price deviation exceeding 5% reached 68.2% for crude oil ETPs (15 out of 22) and 66.7% for silver ETPs (14 out of 21).

It is also important to note that if an ETN’s price drops below 1,000 won due to a sharp decline, it may be subject to early liquidation and automatic delisting. For ETNs issued since 2021, early liquidation clauses apply if the index value falls below 1,000 won; even for ETNs issued prior to that, if the price drops to an extremely low level (such as 100 won or less), managing the tracking error becomes impossible, potentially leading to delisting procedures. Last July, a crude oil inverse leveraged ETN was delisted after its underlying value fell below 20 won.

An official from the Financial Supervisory Service (FSS) stated, “Due to various variables such as international conflicts, climate change, and speculative demand, it is extremely difficult for individual investors to accurately predict the direction of commodity prices,” adding, “We plan to continue monitoring for abnormal signs regarding the trading volume and price deviation of leveraged and inverse products, and will respond proactively—including by issuing additional consumer alerts—if risks escalate.”