[Column] Retail Investors Forget the 'Oil ETN Nightmare' Again Chasing 'Cinderella Short-Term Gains'

[Asia Economy Reporter Lee Seon-ae] 67.5 billion KRW. This is the trading volume poured into "Inverse" ETN products that bet on the decline of crude oil prices and "Double Inverse" ETN products that track the decline of crude oil prices twice. It has increased about 27 times compared to the beginning of the year. As international oil prices fell below $90 per barrel and returned to the level before the outbreak of the Russia-Ukraine war, individual investors betting on the decline of crude oil prices have surged. In the case of the "Samsung Inverse 2X WTI Crude Oil Futures ETN," 21.936 billion KRW worth was traded in just one day on the 5th. This is the largest amount in trading volume this year.

As forecasts emerged that crude oil demand would further decrease, individual investors boldly bet on the decline in oil prices. The problem is that there is a lot of uncertainty to prematurely predict an additional sharp drop. Even if demand decreases, there are geopolitical factors that impact the supply side. As long as the policy stance of the Organization of the Petroleum Exporting Countries Plus (OPEC+) aiming to stabilize the oil market is maintained, both upward and downward rigidity can be strengthened. Additionally, geopolitical risks stemming from Russia act as a downward rigidity factor. There is also a view that international oil prices will remain at a higher level than before COVID-19.

Moreover, ETNs track the underlying index 2 to 3 times, so the risk burden is high. ETNs' returns are determined by price fluctuations of underlying assets such as commodities and exchange rates. Due to the high risk, they are not suitable for medium- to long-term investments. Investors tend to fall into the illusion that they can predict changes in the underlying index. However, the damage is beyond imagination when the index moves differently from expectations. In April 2020, during the "negative oil price" incident, many crude oil ETN investors had to bear massive losses. Due to the COVID-19 impact, international oil prices plummeted, and WTI prices recorded negative values for the first time in history, causing the premium rate of leveraged ETNs pursuing double returns on crude oil futures to soar close to 1000%. Related products were consecutively suspended from trading, and investors suffered losses amounting to trillions of KRW. This is why there are voices of concern that the "crude oil ETN nightmare" should not be forgotten.

It is time to recall Warren Buffett's investment advice: "Do not be fooled by short-term Cinderella-like profits that are only visible at the moment."