Kospi’s 3% Two-Day Swings Leave Both Leveraged and Inverse ETF Bets in the Red

ETF ‘Negative Compounding’ Takes a Toll

Sharp swings in South Korea’s stock market left both investors betting on gains and those wagering on declines with losses. The move reflects the “negative compounding” effect, in which investors lose money even when an underlying asset rises and falls by the same percentage over time.

On Oct. 22, KODEX Leverage closed at 66,770 won, down 6.93% from the previous session on the benchmark Korea Exchange market. The ETF had risen 6.80% a day earlier, but gave up the entire rebound in a single session. An investor who bought the fund at its Oct. 20 close of 67,170 won and held it through Oct. 22 would be down 0.59%.

KODEX 200 Futures Inverse 2X, which bets in the opposite direction, also fell 0.90% over the two-day stretch. The product, known among investors as “Gopverse,” dropped 8.11% from 111 won on Oct. 20 to 102 won on Oct. 21. It then rebounded 7.84% on Oct. 22, but still ended at 110 won, short of recovering its starting point. With the Kospi jumping 3.29% the previous day and then tumbling 3.52% on Oct. 22, investors on both sides ended up in the red.

Asset managers say the move highlights a core feature of leveraged ETFs, which track an underlying asset’s daily return by a multiple. If the Kospi rises 10% from 100 to 110 and then falls 9.09% back to 100, a 2x leveraged product would climb from 100 to 120 and then fall to about 98.18. A “Gopverse” product, which tracks the same index in reverse at two times leverage, would end at about 94.54.

In practice, the losses can widen further once management fees, tracking error and other costs are taken into account. KODEX Leverage and Gopverse track different underlying indexes, with the former linked to the Kospi 200 spot index and the latter to the futures index.

As market volatility increased, leveraged trading tied to directional bets accelerated sharply. On Oct. 22, trading value in KODEX Leverage reached 1.5995 trillion won, while KODEX 200 Futures Inverse 2X posted 1.0675 trillion won, for a combined 2.667 trillion won. “In a market like this, where sharp gains and losses alternate, returns depend not only on direction but also on entry timing and holding period,” an asset-management industry official said.

Jeon Beom-jin, Hankyung.com reporter, forward@hankyung.com