[Derivative ABC] What Are Inverse and Leveraged ETFs?

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[Asia Economy Reporter Park Jihwan] As the spread of the novel coronavirus infection (COVID-19) surged sharply in the first half of this year, investors flocked massively to inverse or leveraged inverse products. The KOSPI plunged to the 1400 level in mid-March and almost simultaneously showed a rapid recovery. At that time, investors expected that a sharp rebound would inevitably be followed by a correction, leading many to participate in inverse investments.

Recently, for similar reasons, investments in these products have been gaining popularity again. This is based on the judgment that if the social distancing level 3 is introduced due to the resurgence of COVID-19, the stock market will undergo some correction.

The characteristic of these two products is that they generate profits in a declining market. First, an inverse product invests in funds that track index declines. This product is designed to track the movement of the underlying asset in the exact opposite direction. It is available in the form of funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs). The inverse ETF designed to move opposite to the KOSPI 200 index fluctuations is the most common product. Inverse investment is a useful method for short-term profit realization or hedging against sudden declines.

Leveraged inverse products, called "Gopbeoseu," are structured to generate twice the returns of inverse products. However, losses can also be doubled in reverse.

Inverse products are often confused with short selling. This is because short selling also profits when stock prices fall. In the domestic market, general investors have almost no way to participate in short selling, but the big difference is that inverse products allow indirect investment in index-tracking products.

There are several precautions when investing in inverse products. Since it is a bet on a decline, a clear signal that the stock market may be corrected, such as the spread of a financial crisis, is necessary. Also, if liquidity in the market is abundant, the stock market is likely to rise, so inverse investment betting on a decline may not be a wise choice.

This content was produced with the assistance of AI translation services.