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As raw material prices have soared this year, funds are rapidly flowing into exchange-traded securities (ETNs), which are specialized investment assets. In the past month, as the ETN market has grown rapidly, the exchange-traded fund (ETF) market has been relatively stagnant.
According to the Korea Exchange on the 6th, the total index value showing the total market size of listed ETNs as of the end of last month was about 10,410.9 billion won, an increase of 8.7% from the end of February (9,573.5 billion won).
On the other hand, the total net assets of all domestic ETFs stood at 74.74 trillion won at the end of March, up only 3.9% from the end of February (71.89 trillion won). The ETN market has grown more than twice as fast as the ETF market. The average daily trading value of ETFs also decreased by about 12% in the past month, while ETNs increased by more than 30%, showing a contrast. ETN’s total market size has exceeded 10 trillion won for the first time in 7 years since its first product was launched in 2014.
ETN is a derivative-linked product issued by a securities company promising to pay a return that is linked to the yield of the underlying index. It is a type of bond in which a securities company pays the rate of return of the underlying index it follows, rather than incorporating stocks and bonds.
Like ETFs, ETNs are listed on an exchange and can be bought and sold like stocks. However, while ETFs are issued by asset management companies, ETNs are issued by securities companies. The two are collectively referred to as an exchange-traded product (ETP). As of the end of March, the size of the ETP market was 85.153 trillion won, an increase of 21.76 trillion won in one year. At this rate, ETP assets are expected to exceed 100 trillion won within one year.
Park Eun-joo, Deputy Head of DS Department at Korea Investment & Securities Co., Ltd. said, “In the case of ETFs, the risk assessment of derivatives cannot exceed 100% of the net asset value (NAV). It is a structure that is virtually impossible to do,” he explained.
On the other hand, ETN is characterized by no such limitation as the underlying index return is guaranteed by the securities company. Products that follow double or -2 times the price of raw materials are mainly ETN.
ETN has an expiration date, and if held until maturity, an amount equivalent to the index value per ETN security can be redeemed from a securities company. ETFs, on the other hand, do not have an expiration date and can be held as long as they are not delisted.
In domestic listed ETNs, overseas leveraged/inverse products account for about 60% of the total. It is a structure that can cause significant investment losses due to changes in raw material prices. In the case of Samsung leveraged WTI crude oil futures ETN, the price has fallen by more than 30% in the past month. This is because the price of West Texas Intermediate (WTI), which had soared to the level of $120, fell to around $100 in a month. On the other hand, Samsung leveraged natural gas futures ETN has risen more than 27% in the past month.
The commodities with the largest gap between futures and spot prices were nickel. Instead, the nickel futures ETN price jumped 22% in the past month. On the other hand, as ETN, which tracks the related index in the opposite direction, went through the delisting process, investor losses increased like a snowball.
When investing in ETN, you should also consider the ‘disparity rate’, which is the difference between the index value and the market price. The discrepancy rate is the ratio of the difference between the index value and the actual market price traded in the market. A positive indicator of investment risk means that the market price is overvalued. Due to the plunge in crude oil prices in 2020, the gap between crude oil leveraged ETNs exceeded 2000%. That’s 20 times more expensive than the fair price. An investor who purchases a product with an enlarged disparity rate may incur an investment loss equal to the difference corresponding to the disparity rate.
Recently, theme-type ETNs have appeared one after another, and investment products are diversifying. Shinhan Financial Investment listed Shinhan FnGuide Metaverse ETN in September last year, and Samsung Securities and KB Securities issued ETNs that track BBIG (battery, bio, internet, game) and rechargeable battery indices.
[김정범 기자 / 신화 기자]
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