After the U.S. and Israel attacked Iran, international oil prices surged and stocks fell, prompting investors to look to oil products as an inflation hedge. In particular, oil exchange-traded notes (ETNs) have delivered high returns during the recent spike in oil and plunge in stocks, quickly boosting investor demand. However, experts said that in a highly volatile phase, those investing in ETNs should pay attention to the premium/discount rate and rollover (futures switch) expense.
An ETN (exchange-traded note) is a structured note whose revenue is linked to movements in an underlying index. It is issued by a securities firm, and at maturity pays investors the underlying index's rate of return over the investment period minus fees and other expense. Underlying indexes include oil, natural gas, gold, and silver.
According to the Korea Exchange (KRX) on the 10th, on the 9th, KB S&P Leverage WTI Oil Futures ETN B closed at 60,855 won, up 22,820 won (60%) from the previous trading day. Mirae Asset Leverage Oil Futures Mix ETN (60%), Samsung Bloomberg Leverage WTI Oil Futures ETN (59.99%), and Samsung Leverage WTI Oil Futures ETN (59.77%) also ended up about 60%.
This was driven by the jump in international oil prices. On concern that prolonged U.S.-Iran tensions could lead to a blockade of the Strait of Hormuz, through which about 20% of global oil shipments pass, April West Texas Intermediate (WTI) futures jumped more than 20% intraday on the 9th, topping $100 per Barrel. It is the highest level in about 3 years and 8 months since July 2022.
As the KOSPI slid to the 5,000 level, individual investors turned their attention to oil. While international oil prices have spiked recently, the domestic stock market has fallen 7% to 12% in a contrasting move, leading to attempts to recoup stock losses through oil ETNs, analysts said.
Indeed, trading volume in oil ETNs has risen noticeably. According to the Korea Exchange (KRX), Samsung Leverage WTI Oil Futures ETN saw a net sell of 180 million won last month (Feb. 2–27), but turned to a net buy of a total 12.5 billion won last week (Mar. 3–6). During the same period, Mirae Asset Leverage Oil Futures Mix ETN also shifted from a net sell of 700 million won to a net buy of 1.1 billion won.
However, experts noted that caution is needed given these are highly volatile products. Oil ETNs track oil futures as the underlying asset. Futures are traded on margin, creating a leverage effect from price swings, so they can be more volatile than the spot.
In particular, many are leveraged products that track twice the underlying index, raising the risk of loss in short-term investing. A person in the securities industry said, "In highly volatile phases, the compounding effect of leveraged products expands," adding, "If the timing is right, one can earn high revenue, but losses can also grow quickly."
In fact, oil price volatility has recently increased. Since March, April WTI futures have surged 5% on the 3rd, 8% on the 5th, and 12% on the 6th. They jumped more than 20% intraday, topping $119. However, after President Donald Trump hinted at the possibility of an end to the conflict, they fell 5% on the 10th, slipping below $90. As a result, oil ETNs that had surged nearly 60% the previous day are now tumbling more than 20% one after another.
Investors should also closely watch the premium/discount rate, which is the gap between the underlying asset and the indicative value (IV). When buy orders crowd into an ETN, the liquidity provider (LP) may fail to quote sufficiently near the indicative value, causing the price to deviate from it. In particular, while the underlying asset is listed on an overseas exchange without price limits, domestic ETNs are subject to a ±30% price limit, which can widen the premium/discount rate in sharp swings.
For example, if you buy an ETN with a high premium/discount rate while oil prices are falling, you may pay more than the value of the underlying asset. Conversely, even after oil prices rise, if the premium/discount rate remains high, the ETN price may fail to fully reflect the underlying asset's gain, leading to a sale at a lower price than expected.
The Korea Exchange (KRX) requires issuers to disclose when the end-of-day premium/discount rate exceeds 1% for domestic ETNs and 2% for overseas ETNs. If it exceeds 6% for domestic and 12% for overseas ETNs, the rate is deemed excessively wide, the product is designated as an investment caution issue, and single-price trading is applied for three trading days.
During periods of oil price swings, investors should also consider the expense from rollover (switching futures). Oil ETNs typically track the nearest-month futures price. Because futures have maturities, they must be rolled into the next contract at set times. Generally, with higher uncertainty about future oil prices, the far-month is priced higher than the near-month, resulting in an expense from the switch.
However, this time, due to geopolitical uncertainty, April WTI is priced higher than May WTI, leading to analysis that rollover expense will be limited. Another person in the financial investment industry explained, "In a contango situation where the far-month is more expensive than the near-month, the futures switch cost is reflected in the ETN and can reduce returns, but currently, due to the Iran situation, the near-month is more expensive than the far-month, a backwardation situation," adding, "As a result, the ETN can actually benefit at the time of the switch."