Dilution of returns reappears! Oil and gas linked funds "can't keep up" with ETF fluctuations. What happened?

The “black swan” of Middle East geopolitical conflicts is stirring up wings, triggering a domestic investment boom in oil and gas themed funds.

Recently, a large amount of capital has been flowing into oil and gas assets through ETFs and linked funds. In just the past week, net inflows exceeded 22.5 billion yuan. However, amid the frenzy of capital chasing, the phenomenon of “diluted returns” has reappeared, with several oil and gas ETFs’ off-exchange linked fund net values significantly lagging behind, far below the performance of on-exchange ETFs. Currently, multiple fund companies have issued notices to urgently “limit flows” into their products.

New inflows into oil and gas funds are surging

The rapid spread of Middle East conflicts into the capital markets has not only driven international oil prices higher but also made oil and gas themed funds quickly become market favorites, emerging as a standout amid recent volatility.

This trend has been especially evident over the past week. Wind data shows that since the beginning of the year, net subscriptions to oil and gas funds have exceeded 30 billion yuan. In just five trading days since March, net inflows reached 22.565 billion yuan, accounting for over 70% of the year’s total increase, indicating a sense of urgency among short-term investors.

Looking at specific products, on-exchange investments in A-shares via oil and gas ETFs have become the main battleground for this influx of funds. As of March 6, Guotai Petroleum ETF, Penghua Petroleum ETF, and Huitianfu Petroleum ETF received net subscriptions of 6.598 billion, 4.847 billion, and 4.014 billion yuan respectively since March, collectively attracting over 15 billion yuan, accounting for half of the incremental funds. Clearly, in a highly volatile market environment, investors are trying to quickly seize short-term opportunities driven by geopolitical conflicts through liquidity-rich, easily tradable ETF products.

Linked funds “can’t keep up” with ETFs

It is worth noting that with the concentrated influx of new funds, the phenomenon of “diluted returns” has reappeared, with off-exchange linked funds lagging behind the performance of on-exchange ETFs on multiple trading days.

For example, the Guotai Petroleum ETF, which had the largest net subscription scale this year, saw on March 2 and 3 a 10.03% and 7.97% increase in its on-exchange net value. However, due to the surge in subscription funds, the off-exchange linked funds’ net values only increased by 6.97% and 2.94% on those days.

Conversely, during market corrections, the net value declines of these off-exchange linked funds were smaller than those of the on-exchange ETFs. On March 4 and 5, the ETF declined by 7.43% and 1.32%, while the off-exchange linked funds only fell by 2.17% and 0.02%.

Similar situations occurred with Penghua Petroleum ETF, which also saw on March 2 and 3 a 9.99% and 9.95% rise on the exchange, but due to large subscription inflows, its off-exchange linked funds’ net values only increased by 7.60% and 3.44% on those days.

Third-party fund evaluators noted: “This is mainly because the large subscription inflows caused many oil and gas ETFs’ off-exchange linked funds to quickly absorb a lot of capital in the short term. However, these funds are only available T+2, so they couldn’t be used to build positions in time, which effectively diluted the stock holdings and caused the net value increases to lag behind the index and ETFs.”

Currently, several oil and gas funds have announced restrictions on large off-exchange subscriptions, or even completely closed to new investors. For example, since March 2, Bosera S&P Oil & Gas (QDII) has limited daily subscriptions, conversions, and regular investments to no more than 200 yuan per fund account across all distribution channels. Nuoya Oil & Gas Energy (LOF) suspended subscriptions (including regular investments) from March 5, and Huabao Oil & Gas (LOF) suspended subscriptions and regular investments from March 6.

Oil prices continue to rise

Recently, international oil prices have continued to climb, attracting global investor attention. On March 6, ICE Brent crude surged 9.26%, briefly reaching a high of $94.64 per barrel, with year-to-date gains exceeding 50%.

Wang Xiang, fund manager of Bosera Oil & Gas ETF, stated that the “substantive closure” of the Strait of Hormuz and the rerouting decisions by maritime insurers and shipping companies are pushing geopolitical premiums from the financial level into the physical level. Under current supply-demand and inventory conditions, baseline scenarios suggest oil prices may remain high. Orders for oilfield equipment and offshore engineering are expected to benefit from event-driven momentum. Domestic targets are likely to benefit, while rising insurance costs and port congestion risks will increase overall chain costs. Leading shipping companies and those with strong fleet structures are more resilient; container shipping and dry bulk are less affected but require attention to disruptions in Red Sea transit caused by Houthi armed groups.

“However, macro geopolitical developments are unpredictable, and reversals are common. The oil and gas sector may experience sharp pullbacks and re-pricing in a high-volatility environment. Investors should adopt a strategic allocation approach and avoid overtrading based on short-term sentiment,” Wang Xiang advised.

Ren Fei, Deputy Director of the Equity Research Department at China-Europe Fund, suggested that driven by Middle East geopolitical tensions, a strategic bullish view on resource commodities, oil and gas, and coal chemical sectors is recommended. The oil and gas exploration and refining sectors directly benefit from rising oil prices. About 20% of global crude oil trade depends on the Strait of Hormuz. In the short term, uncertain geopolitical situations and the risk of shipping insurance refusals support high Brent crude prices. JPM estimates that current Brent prices only embed a $10 risk premium; if global oil transportation continues to be hindered, prices could rise further.

Ren Fei recommends increasing focus on oil and gas resources and cost-advantaged coal chemical assets amid heightened short-term uncertainties. In the medium term, these sectors have low correlation with previous market hot spots, helping hedge against market corrections caused by inflationary stagnation in developed countries due to oil price fluctuations.

Morgan Stanley resource allocation hybrid fund manager Shen Jing believes that escalating military conflicts between the US, Israel, and Iran—beyond previous market expectations—significantly heighten global oil supply risks. Short-term oil prices are mainly influenced by the resumption of navigation through the Strait of Hormuz and the duration of the conflict. Since the Strait accounts for about 20% of global oil and natural gas transportation, if the conflict impacts oil infrastructure and transportation, prices could be further driven up, especially if the US President’s statements about potential military action against Iran persist for weeks.

(Article source: Securities Times)