With the KOSPI on the verge of breaking through 8,000 points, prices of "geared inverse" ETFs, which bet on a market decline, are setting fresh record lows day after day. In particular, as share prices have collapsed to the "ten-won stock" level, concerns about price distortion are growing, but with no clear fix in sight, the market's worries are deepening.
On the 14th, the KOSPI closed at 7,981.41, up 1.75% (137.40 points) from the previous day. The KODEX 200 Futures Inverse 2X ETF, which bets on a decline in the domestic market, fell 4 won (3.70%) to 104 won from the day before.
This product tracks the daily return of the KOSPI 200 futures index at negative (-) two times. In other words, the index must fall for revenue to be generated. As the KOSPI has surged this year, the geared inverse ETF price has plunged in the other direction. From the 500-won range at the start of the year, the share price has dropped more than 82%, barely clinging to the 100-won level.
The problem is that when the per-unit price becomes excessively low, the likelihood of price distortion increases. Even if an ETF's price falls, the tick size remains unchanged. For example, when the tick size is 5 won and the price falls by one tick, a product priced at 10,000 won per unit moves just 0.05%, but a 100-won product moves as much as 5%. In a highly volatile market, even a one-tick move can cause a sharp price swing, exposing the very limits of "penny stocks."
ETFs are not free from delisting risk either. Typically, after being designated as an issue under management when the trust principal (capital) and total net worth fall below 5 billion won, the ETF is delisted if the reason is not resolved by the end of the next half-year. In addition, the absence of a liquidity provider (LP) or failure to properly track the underlying index can also lead to delisting.
The problem is that there is no mechanism at all to prevent such price distortions in geared inverse ETFs. Under current exchange rules, there is no basis to delist an ETF solely because its price is low, and because of legal interpretations, it is also difficult to attempt a reverse split like a stock. In theory, even if the price per ETF unit falls below 100 won and becomes what is known as a ten-won stock, trading itself can continue.
The Korea Exchange (KRX) is aware of the issue of falling prices for geared inverse ETFs but has yet to find an appropriate solution.
An exchange official said, "We reviewed this a few years ago, but the Ministry of Government Legislation interpreted that face-value splits or reverse splits are not allowed for funds," adding, "Since ETFs are also funds, it is legally impossible."
Meanwhile, turnover in the KODEX 200 Futures Inverse 2X ETF reached 785.2 billion won on the 14th alone. Looking at investors' trading records linked to Naver Pay's "My asset service," most were in loss territory. The average loss rate for 12,707 investors who invested in KODEX 200 Futures Inverse 2X stands at 90.66%.