The KOSPI has surged from around 4,200 points at the end of last year to over 8,000 points this year, causing significant losses for individual investors who heavily bet on inverse and leveraged exchange-traded funds (ETFs). Some of these funds are nearing delisting requirements. There are growing calls in the market for regulatory adjustments, including share consolidation.
According to the Korea Exchange on May 13, the prices of several KOSPI 200 leveraged inverse ETFs, including KODEX 200 Futures Inverse 2X, TIGER 200 Futures Inverse 2X, RISE 200 Futures Inverse 2X, and KIWOOM 200 Futures Inverse 2X, have all fallen to around 100 won. Only PLUS 200 Futures Inverse 2X remains above 200 won.
After the KOSPI first surpassed 7,000 points on May 6, it continued its strong performance, reaching nearly 8,000 points during intraday trading on May 12. As a result, the losses for leveraged inverse ETFs have rapidly increased. Over the past month, these ETFs have seen returns of approximately -48%, and around -64% over the last three months.
Just a year ago, these funds had total net assets exceeding 5 billion won, but now, some ETFs, excluding KODEX and TIGER products, are approaching delisting thresholds. According to Korea Exchange regulations, an ETF can be delisted if its total net assets fall below 5 billion won after one year of establishment.
With some analysts predicting further KOSPI gains, concerns surrounding leveraged inverse ETFs are intensifying. Hyundai Motor Securities raised its year-end KOSPI forecast on May 11 to 9,750, suggesting a potential rise to 12,000 points.
Industry experts warn that if the KOSPI continues to rise for an extended period, the prices of leveraged inverse ETFs could effectively approach zero. This is due to the negative compounding effect inherent in inverse leveraged ETFs during periods of index growth. Even if the index returns to its original level, the ETF's returns do not recover. An asset management official stated, "Inverse leveraged products have a negative compounding effect, so even if the index returns to its original position, the product's returns do not recover," adding that the recent price drops have left investors exposed to high volatility.
However, the asset management industry is not currently considering delisting. There remains significant demand from individual investors. According to Koscom ETF CHECK, KODEX 200 Futures Inverse 2X ranked third among the most purchased products by individual investors over the past month, with net purchases totaling 737.1 billion won.
Market analysts attribute the heightened caution regarding KOSPI overheating to factors such as Middle East risks, valuation pressures, and the "Sell in May" sentiment. There is an influx of funds betting on a correction following the recent rapid rise.
The industry is calling for regulatory improvements, such as allowing share consolidation for ETFs, to stabilize prices and protect investors. While share consolidation is permitted in the U.S. market, there is currently no clear legal basis for it in South Korea, effectively blocking the process. When fund sizes shrink, implementing operational strategies becomes challenging due to minimum trading unit issues, and excessively low share prices can increase the burden on liquidity providers. A financial authority official stated, "We recognize the market's call for regulatory improvements, including share consolidation for ETFs, and we are monitoring the situation closely."
* This article has been translated by AI.
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