Will Individuals Holding Inverse ETFs Smile in December?

Net Purchase of 700 Billion Won Last Month
Even If Correction Comes, Narrower Fluctuations Than Sharp Drop Expected, Profits May Be Difficult

[Asia Economy Reporter Oh Ju-yeon] Attention is focused on whether individual investors who invested 700 billion KRW worth of inverse exchange-traded funds (ETFs) last month will be able to make a profit in December.

According to the Korea Exchange on the 1st, from the 2nd to the 27th of last month, individuals purchased 704.2 billion KRW worth of KODEX 200 Futures Inverse 2X ETF. However, during this period, the KOSPI rose 14.49% from 2300.16 to 2633.45, while the price of KODEX 200 Futures Inverse 2X fell 25.52% from 4,290 KRW to 3,195 KRW.

The average price at which individuals accumulated shares was highest on the 2nd of last month at 4,338 KRW, and on the 27th it was 3,211 KRW, closest to the recent price. The average price during this period was 3,643 KRW. As of 9:30 AM on that day, the price was 3,225 KRW, down 11.47%. This means that the price of KODEX 200 Futures Inverse 2X needs to rise to the 3,600 KRW range for the inverse product accumulated last month worth 700 billion KRW to generate profits.

Since the stock market rose sharply last month, some opinions suggest that the foreign investors' sell-off the day before was not merely a temporary event due to the Morgan Stanley Capital International (MSCI) regular index rebalancing, but there is also analysis that it is not a signal of foreign capital outflow, leading to mixed expectations for the stock market direction in December. However, experts unanimously agree on a market rise next year, so holding inverse products for the long term is expected to be burdensome.

As the stock market fluctuates, if there is a downward trend in December, it could be an opportunity to sell inverse ETFs, but even if a correction occurs, it is expected to fluctuate within a narrow range rather than a sharp drop like in August. In such a case, even if the index falls, it may be difficult to make profits from inverse ETFs.

KODEX 200 Futures Inverse 2X tracks the daily return of the KOSPI 200 index at -2 times. If the index falls 1%, it can generate a 2% profit, but since it follows daily returns, the cumulative return over a certain period may not correspond to twice the return. Profits can only be made if the index is in a downward trend; in a sideways market, losses can occur, so it is generally not suitable for long-term investment. It means that it should only be approached as a short-term investment when there is confidence in the direction of the stock price.

However, looking at this recent individual inverse investment, theory and practice did not align. Investors who experienced the inverse ETF price soaring from 5,500 KRW to the 12,000 KRW range when the stock market crashed due to COVID-19 in March this year entered the inverse market late, and the volume they accumulated at that time still amounts to around 3 trillion KRW. Along with this, expecting a selling offensive by market participants at year-end and betting on a market decline, the volume of inverse ETFs accumulated in November held by individuals reached 600 billion KRW, making the total inverse holdings by individuals from March 19 to November 30 about 3.6 trillion KRW.