"The KOSPI Hasn't Even Hit 6,000, but We're at New Lows Again"... Double Inverse ETFs Suffer in Sideways Market

According to the Korea Exchange (KRX) on the 22nd, KODEX 200 Futures Inverse 2X closed at 233 won on the 18th, marking its lowest closing price ever. Mirae Asset TIGER 200 Futures Inverse 2X ETF at 246 won, RISE 200 Futures Inverse 2X ETF at 237 won, and PLUS KOSPI 200 Futures Inverse 2X ETF at 483 won also all set record lows on the same day.

These Exchange-Traded Fund (ETF) products are double inverse leveraged ETFs that track twice the daily decline of the KOSPI 200 Index Futures. As the KOSPI has risen sharply since April last year, these double inverse leveraged ETFs have been stuck in a downtrend for about a year, but investor interest picked up again late last month when geopolitical risks in the Middle East flared up.

However, as these products keep setting new lows, some are now talking about an "inevitable loss" theory for double inverse leveraged ETFs. Their previous record lows were set on the 26th of last month, when the KOSPI closed at an all-time high of 6,307.27. When the ETFs hit fresh lows again on the 18th of this month, the KOSPI was at 5,925.03, roughly 400 points below its peak. In other words, even though the KOSPI has not revisited its record high and has not even recovered the 6,000 level, the double inverse leveraged ETFs are still at their lowest prices.

According to NH Investment & Securities, as of the 18th of this month, 15,832 of its clients held KODEX 200 Futures Inverse 2X. Among them, 99.99% were in the red, with an average return of minus 56.19%.

Experts point to the "negative compounding effect" as the main reason double inverse leveraged ETFs struggle to generate positive returns in a sideways market. The Korea Capital Market Institute explains that if the underlying index rises 10% one day and falls 9% the next, the index’s cumulative return is +0.1%, but the double inverse leveraged ETF’s return would be about −5.6%. The index is slightly up overall, yet the ETF shows a substantial negative return.

There are also hidden trading costs in these products. As the price of a double inverse leveraged ETF falls, the bid–ask spread tends to widen, increasing transaction costs. The minimum tick size for an ETF is 1 won. When the ETF price drops to very low levels, even a 1-won move can mean a large percentage swing, and the gap with its actual Net Asset Value (NAV) can widen. Since most double inverse leveraged ETFs have effectively become penny stocks, trading has become much more inefficient.

Kwon Min-kyeong, a research fellow at the Korea Capital Market Institute, said, "Leveraged and inverse products can be particularly vulnerable to the negative compounding effect," adding, "Investors who trade frequently need to recognize that mark-to-market losses and transaction costs can end up being much larger than they initially expected."

Even so, retail investors’ enthusiasm for double inverse leveraged ETFs shows no sign of fading. So far this month, the combined trading value of five such ETFs has reached 20.6893 trillion won. In particular, KODEX 200 Futures Inverse 2X alone recorded 20.3864 trillion won in turnover, ranking third in trading volume among 1,072 ETFs. Retail investors account for about half of this activity: their buy orders in KODEX 200 Futures Inverse 2X totaled 9.8483 trillion won, nearly half of the product’s total trading value of 20.3864 trillion won.

A source in the financial investment industry noted, "During the COVID-19 pandemic, when markets were extremely volatile, many retail investors jumped in late, driven by Fear of Missing Out (FOMO), and interest in these products surged—but it ultimately led to losses." The source added, "These products are designed mainly for short-term trading, so the longer you hold them as a long-term investment, the harder it becomes to generate positive returns."