"It’s really dizzying"... Wild swings in crude oil ETFs as Middle East tensions roil oil prices

According to Financial News, international oil prices have been hovering around and above 100 dollars per barrel amid heightened geopolitical tensions in the Middle East, sending them into sharp swings. As a result, crude oil exchange-traded funds (ETFs) listed on the domestic stock market have also been experiencing extreme price volatility. ETFs that are supposed to track their underlying indices are instead whipsawing on a daily basis, adding to investor confusion.
According to the Korea Exchange (KRX) on the 13th, the price of "KODEX WTI Crude Oil Futures ETF (Hedged)" closed at 22,075 won in the previous session, up 10.57% from the day before. It is considered highly unusual for an ETF, which is designed to help diversify risk, to swing more than 10% in a single day.
Such extreme volatility in crude oil ETFs is not a new development. On the 9th, as international oil prices topped 100 dollars per barrel for the first time ever due to the Middle East crisis, the ETF surged to its intraday upper price limit and ultimately finished the session up 29.31%.
However, on the very next day, the 10th, it plunged 14.08%, giving back most of those gains. It then fell another 4.93% on the 11th, dragging the price down into the 10,000-won range. On the 12th it again posted a double-digit percentage gain, underscoring a market so volatile that it is difficult to discern any clear direction.
"KODEX WTI Crude Oil Futures ETF (Hedged)" is designed to track the returns of the United States Oil Fund ETF (USO), the world’s largest crude oil ETF, which mainly holds near-month West Texas Intermediate crude oil (WTI) futures traded on the New York Mercantile Exchange (NYMEX). It has generally been regarded as a product with relatively modest price movements. With a market capitalization of about 160 billion won, it is the largest crude oil ETF in Korea, and over the past three years its share price has mostly fluctuated between 10,000 and 15,000 won.
Inverse products that generate profits when international oil prices fall are in a similar situation. As oil prices continue to swing wildly, products such as "TIGER WTI Inverse Futures (H)" and "Samsung KODEX WTI Crude Oil Futures Inverse (H)" have also been rising and falling by around 10% almost every day, increasing investor fatigue. On this day, the two products closed down 9.60% and 9.46%, respectively.


The backdrop to crude oil ETFs swinging even more violently than ordinary stocks appears to be investor sentiment becoming excessively fixated on each new piece of news about geopolitical risks. In addition, unlike ordinary listed companies, ETFs cannot be placed on the Korea Exchange’s investment warning list, raising concerns that individual investors may underestimate the actual level of risk.
Another key risk factor is the growing number of cases in which the deviation between the market price and the real-time Indicative Net Asset Value (iNAV) exceeds the threshold, meaning the ETF trades at a significant premium or discount. KRX data show that since the start of this month, there have been more than 250 disclosures warning of excessive ETF price deviations. Considering that there were 372 such disclosures in the entire previous month, roughly two-thirds of that monthly total have been issued in just seven trading days. As oil prices have swung sharply in a short period, it has become difficult for liquidity providers (LPs) to quote appropriate bid and ask prices. Critics warn that this could lead investors to buy at the top, paying far more than the ETF’s actual value.
The financial authorities are also closely monitoring the abnormal price movements of crude oil ETFs and related products. On the 12th, the Financial Supervisory Service (FSS) held a meeting at its headquarters in Yeouido, Seoul, to urge caution among investors in light of market instability stemming from the prolonged Middle East crisis. At the meeting, the FSS asked securities firms and asset managers to first review the risk factors of ETFs and exchange-traded notes (ETN) that have seen a surge in trading volume.
Market participants expect crude oil ETFs to remain driven more by investor sentiment than by the actual movement of their underlying asset, oil prices, for the time being. In an environment where prices can change dramatically overnight depending on international developments, speculative capital seeking short-term gains tends to flood into these products, further amplifying price volatility and overshadowing the original index-tracking purpose of ETFs.


hsg@fnnews.com Han Seung-gon Reporter