4 of 5 double-inverse ETFs now trading below 100 won

Products face watch-list designation, possible delisting

Reverse stock split needed but regulatory gap remains

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As the Kospi extends its record-breaking rally, double-inverse exchange-traded funds — products that profit when the market falls — are facing the threat of delisting. Their prices have dropped below 100 won, fueling concerns about widening gaps between market prices and net asset values (NAV).

According to Korea Exchange data, the KODEX 200 Futures Inverse 2X ETF closed Thursday down 12.68 percent at 62 won, marking an all-time low. The product's one-year return stood at minus 95.55 percent as of Thursday's close.

The Kospi has surged 107 percent since the start of this year through Thursday, dealing a severe blow to double-inverse ETFs, which track twice the daily inverse return of the KOSPI 200 futures index. When the index rises 1 percent, these ETFs fall 2 percent; when it drops 1 percent, they gain 2 percent. Losses have compounded further due to a "negative compounding effect" that accumulates as the index fluctuates. As a result, all Kospi double-inverse ETFs have posted returns below minus 90 percent since the start of the year.

Four of the five double-inverse ETFs currently listed in South Korea have fallen below 100 won, effectively becoming penny stocks. The RISE 200 Futures Inverse 2X and KIWOOM 200 Futures Inverse 2X are trading at around 63 won and 61 won, respectively.

Some products may be heading toward delisting. Under current rules, an ETF listed for more than one year is designated a watch-list stock if its trust principal or total net assets fall below 5 billion won ($3.24 million), and a product designated twice becomes subject to delisting.

According to ETF CHECK, the total net assets of the RISE 200 Futures Inverse 2X stood at just 3.2 billion won as of Thursday. The KIWOOM 200 Futures Inverse 2X and PLUS 200 Futures Inverse 2X had net assets of 2.3 billion won and 1.5 billion won, respectively — both below the threshold. These products could be designated watch-list stocks at the start of next month, the first trading day of the next half-year period.

The extremely low prices are also raising concerns about price distortion. When an ETF price falls to around 100 won, the minimum bid increment of 1 won represents 1 percent of the price. In a low-volume environment, even small orders can cause large swings in the asking price, making it more likely that the gap between the market price and NAV will widen.

Market participants believe that if the Kospi climbs to the 10,000-point level this year, double-inverse ETF prices could fall sharply further. By simple calculation, a double-inverse ETF currently trading around 90 won could drop to around 40 won, and the actual decline could be even steeper once the negative compounding effect is factored in.

Voices in the asset management industry are calling for price normalization through measures such as reverse share splits. However, ETFs are legally classified not as stocks but as collective investment securities. Under current commercial law, share splits and reverse splits apply only to shares issued by companies, making it difficult to apply such rules to ETFs.

"Listing single-stock leveraged ETFs at a high reference price of 20,000 won was itself a measure that took into account the risk of inverse products falling too low," one asset management industry official said. "Double-inverse ETFs that have dropped below 100 won also need a regulatory fix that allows their reference price to be adjusted."


moon@heraldcorp.com