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

Negative Compounding Effect Hits ETFs

Sharp swings in South Korea’s stock market left both bullish and bearish investors nursing losses. The reason is the “negative compounding effect,” under which investors can lose money even when an underlying asset rises and falls by the same percentage.

On Oct. 22, KODEX Leverage closed at 66,770 won, down 6.93% from the previous session on the benchmark KOSPI market. The ETF had risen 6.80% a day earlier, but surrendered all of that gain in a single session. An investor who bought the product at 67,170 won on Oct. 20 and held it through Oct. 22 would have posted a 0.59% loss.

KODEX 200 Futures Inverse 2X, which bets on the opposite direction, also fell 0.90% over the two sessions. The product, known among investors as “Gobus,” dropped 8.11% to 102 won on Oct. 21 from 111 won on Oct. 20. It then rebounded 7.84% on Oct. 22, but still closed at 110 won, failing to recover to its starting point. After the KOSPI jumped 3.29% the previous day and then slumped 3.52% on Oct. 22, investors on both sides ended up in the red.

The asset-management industry says the moves underscore a defining 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 drop to about 98.18. A 2x inverse product tracking the same index in reverse would fall to about 94.54.

Losses can widen further once management fees, other costs and tracking error are taken into account. KODEX Leverage and Gobus, however, track different underlying benchmarks: the KOSPI 200 spot index and a futures index, respectively.

As market volatility intensified, trading in leveraged products tied to market direction surged. On Oct. 22, turnover in KODEX Leverage reached 1.5995 trillion won, while KODEX 200 Futures Inverse 2X recorded 1.0675 trillion won, bringing the combined total to 2.667 trillion won. In a market 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