Oil and gas themed funds experience significant pullbacks, but cannot prevent capital from flowing into QDII products.

Originally from: Economic Information Daily

Before the market opened on April 1, four funds—including the E Fund Oil Securities Investment Fund (QDII-LOF) and the E Fund Oil Securities Investment Fund (QDII)—successively released announcements warning about the premium risk of trading prices in the secondary market. A reporter, using the Tonghuashun iFinD data, found that for oil and gas sector themed funds, intraday transaction price premiums remain persistently high. During March, across the whole market, 10 oil and gas sector themed funds collectively issued 175 premium risk warning announcements.

Frequent premium risk warning announcements and temporary trading halt announcements, together with the highly volatile international oil prices, generally led oil and gas sector themed funds traded on-exchange to undergo a significant pullback. However, the fund products’ tradable units and scale showed divergence. iFinD data shows that among nine oil and gas sector themed ETF fund products established for more than one year, 2 QDII equity funds continued to receive net inflows, while for 7 passive index-based equity funds, both their tradable units and scale saw sharp declines.

Cooling off of high premiums in exchange trading

The high premium of oil and gas sector themed funds is closely tied to the recent uptrend in international oil prices. iFinD data shows that Brent crude’s front-month continuous contract (BRN0Y) settled at only $72.87 on February 27. Driven by the situation in the Middle East, during trading on March 9 it once approached $120, with that day’s settlement price at $98.96. Afterwards, prices continued to trade at high levels with ongoing consolidation; on March 19, during trading it again approached $120, and that day’s settlement price was $108.65.

Affected by the international oil price surge caused by the Middle East situation, oil and gas sector themed funds saw a collective rally. With calculations separated by different share classes, in the entire market there were 55 oil and gas sector themed funds. Among them, 7 QDII commodity-type funds saw gains of all over 60% year-to-date and have also all paused subscriptions currently. There were 18 QDII equity funds, with gains year-to-date ranging from 29.58% to 44.92%; currently, only 6 are open for subscriptions.

Under the “subscription limit rush” in the primary market, trading heat for oil and gas sector themed funds in the secondary market surged. With funds rushing in and international oil prices fluctuating, premium levels for oil and gas sector themed funds have been continuously pushed higher. Taking oil and gas sector themed ETF funds as an example: among the nine fund products established for more than one year, only the Franklin S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) and the E Fund S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) showed high premiums.

Specifically, the premium rates of both the Franklin S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) and the E Fund S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) reached their highest points on March 24, at 28.75% and 19.98% respectively. In March, they issued 43 and 15 premium risk warning announcements respectively. As of March 31, their premium rates had fallen sharply to 12.26% and 12.52% respectively.

Corresponding to the ongoing “cooling” of exchange-traded premiums, the on-exchange trading prices of the two funds mentioned above saw a significant pullback. Taking the E Fund S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) as an example, during intraday trading on March 24 the fund touched 1.560 yuan; by the close on March 31 it fell to 1.435 yuan. After it temporarily halted trading in the early hours of April 1 and then resumed, its trading price kept sliding downward, dropping 9.76% on the day to 1.295 yuan.

Divergent fund flows into oil and gas funds

With the premium rates continuing to fall and the on-exchange trading prices coming back down, several oil and gas sector themed ETF funds experienced a spike-then-pullback pattern in assets under management and a sharp contraction. Taking the 汇添富中证油气资源ETF (Huatiandfu CSI Oil & Gas Resources ETF) as an example: on February 27, its tradable units and scale were 604 million units and 923 million yuan respectively. By March 9, it rose to a peak of 3B units and 5.07B yuan respectively. By March 31, both had dropped to 1.18B units and 1.75B yuan respectively.

However, funds still flowed into the on-exchange-traded oil and gas sector themed QDII funds. The tradable units of the Franklin S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) and the E Fund S&P U.S. Oil & Gas Exploration & Production Select Industry ETF (QDII) rose from 674 million and 1.47B units on February 27 to 777 million and 1.7B units on March 30, respectively. During the period, the circulation scale increased by 318 million yuan and 620 million yuan, respectively. Both tradable units and scale reached new highs.

“During this round, the international oil price rose sharply while experiencing severe volatility. The main drivers are the combined effects of factors such as the global crude oil market’s supply-demand relationship and geopolitical circumstances, among others,” a person from a fund company in South China told a reporter. Due to large-scale subscription limits on oil and gas sector themed QDII funds in the primary market, investors could only shift to buying up shares through trading on-exchange, and the resulting supply-demand imbalance pushed up the premium level of on-exchange-traded oil and gas sector themed QDII funds.

The aforementioned source noted that the rise and fall of oil and gas sector themed funds is tightly linked to international oil prices. Paying an excessively high premium in advance effectively prices in future potential gains. Some oil and gas sector themed funds that were heavily speculated on earlier are still sitting at high premium levels. For investors who are still watching and planning their positions in oil and gas sector themed funds, they should remain alert and avoid chasing higher prices. Once expectations fail or sentiment cools, investors may face a scenario where the oil price does not fall, but the fund price falls sharply.

Regarding the future trend of international oil prices, Galaxy Futures reminded that the conflict in the Middle East has both escalated and cooled down repeatedly, causing a “whip effect” in the market; international oil prices will remain volatile at high levels. Analysts at Shenwan Hongyuan Futures Research Institute stated that, influenced by current “cooling down” signals from the Middle East situation, international oil prices once surged and then pulled back, and market risk premiums consequently gave back. However, if in the coming weeks there is no substantive progress in ceasefire talks or if conflicts unexpectedly escalate, oil prices still carry the risk of a second surge.

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