The regulator says 88% of crude oil ETP assets and 94% of natural gas ETP assets are concentrated in leveraged or inverse products, while elevated premiums and ETN delisting provisions add further risks.
The Financial Supervisory Service (FSS) of South Korea has warned investors about risks related to commodity exchange-traded products (ETP), including exchange-traded funds (ETF) and exchange-traded notes (ETN), due to high concentration of leveraged and inverse products.
Most of the crude oil ETPs and natural gas ETPs are leveraged or inverse products, accounting for 88% and 94% of assets, respectively
The regulator points out that most of the crude oil ETPs and natural gas ETPs are leveraged or inverse products, accounting for 88% and 94% of assets, respectively, indicating that investors are largely exposed to riskier and more speculative instruments.
These products reset their exposure daily and can generate negative compounding effect, which means repeated gains and losses can reduce products performance, even if the underlying asset ends up relatively unchanged.
Geopolitical tensions have fuelled significant volatility across commodity markets this year. WTI crude oil futures illustrate this trend, rising 97% from US$57.3 per barrel in January to US$113 in April, falling 39% to US$68.6 in July, and then recovering 46% to reach US$100 this month.
Another key risk is the premium/discount ratio, which measures the gap between an ETP's market price and its underlying net asset value. Strong speculative demand can push prices above their underlying value, exposing investors to losses when the premium eventually narrows, even though the commodity itself remains unchanged.
For ETN investors, they should also be aware of the conditions that may trigger early redemption or delisting. ETNs issued since 2021 include an automatic delisting provision if their price falls below KRW1,000, while older ETNs may also face delisting if their prices decline to levels where premium/discount ratios can no longer be effectively managed.
The FSS warning comes against a backdrop of continued market growth. Although commodity ETPs account for just 2.6% of Korea's KRW469 trillion (US$345 billion) ETP market, assets in crude oil-linked products have jumped 46.7% from KRW1.8 trillion at the end of 2025 to KRW2.7 trillion on 11 September this year, indicating growing investor demand amid heightened volatility.
The financial watchdog stated it will keep a close watch on commodity ETPs, especially leveraged and inverse products, for signs of unusual trading patterns, particularly elevated trading volumes and widening premium/discount ratios. The FSS added that it would consider further consumer alerts and other supervisory measures if geopolitical tensions continue to amplify risks for investors.
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