Why I think leveraged ETFs like 7709 are, in essence, a naturally negative-EV product?

Many people interpret 7709 as:
If SK Hynix rises 1%, 7709 rises 2%.
Sounds very simple.
In fact, many people think it is safer than perpetual contracts, because there is no clear liquidation line, so it won’t suddenly “get liquidated” like a futures contract account.
But once you truly understand its daily rebalancing mechanism, you’ll find:
7709 is not as simple as “two times the same as Hynix.”
In essence, it is a long-running, mechanical strategy that chase-runs and kills-on momentum, continuously bearing volatility drag losses—while also paying leverage costs in the form of financing and derivatives costs.
It takes on the negative path-dependent effects similar to a short option seller’s Short Gamma, but without receiving the IV and Theta compensation that an option seller should get.
This is the core reason I think it is inherently negative EV.
1. Why must 7709 keep rebalancing?
Suppose the fund’s NAV is 100 and the target leverage is 2x, then it needs to maintain 200 of SK Hynix exposure.
If Hynix rises 10%, the fund makes about 20, and NAV becomes 120.
The original 200 position rises, and the market value becomes 220.
At this point the actual leverage becomes:
220÷120 = 1.83x.
To restore to 2x, the fund’s target exposure should be:
120 × 2 = 240.
So it must add 20 more exposure only after Hynix has already risen.
Conversely, if Hynix falls, the fund’s NAV declines faster than the position market value, so actual leverage exceeds 2x.
To bring leverage back to 2x, it must sell part of the position only after Hynix has already fallen.
Therefore, the rebalancing direction of this kind of leveraged ETF is always:
Adding exposure after the rise;
Reducing exposure after the decline.
That is the standard:
Chasing gains and selling into declines.
2. Why do I say that every rebalancing will lose money?
What I mean by “losing money” here is not that right after an order fills, the account instantly shows a loss.
Not that it means:
Every rebalancing is a delayed response to price action that has already happened.
Hynix has already risen from 100 to 110, and the fund only then realizes its leverage is insufficient, so it adds exposure near 110.
But the right time to increase exposure is before the rise happens, or at least during the rise.
If the price has already risen for a while before you buy, the buying price will inevitably be higher.
Likewise, Hynix has already fallen from 100 to 90, and the fund only then realizes its leverage is too high, so it cuts exposure near 90.
The right time to reduce exposure is before the decline happens, or at least during the decline.
If the price has already fallen for a while before you sell, the selling price will inevitably be lower.
So from the goal of “continuously maintaining two times leverage,” every rebalancing has one definite fact:
It is always one step behind.
During rises, it earned less than it could have by increasing exposure earlier;
During the decline, it bears losses that could have been avoided by reducing exposure earlier.
This is the loss caused by delayed rebalancing.
Of course, some people may object:
If you add exposure after the rise, and then the price keeps rising, can’t the newly added position still make money?
Of course.
But that is the return generated by the next phase of the market.
After the later market move, the fund will adjust its position again according to the new rise or fall.
You cannot use the fact that the next phase of the market may continue rising to deny the opportunity loss that has already occurred in the previous phase because the fund did not maintain two-times exposure in time.
More accurately:
Past market action determines why and how much to rebalance;
Current rebalancing resets future risk exposure;
Future market action determines the actual profit and loss after the new position is added.
But relative to an ideal strategy that can maintain two times leverage in real time, the loss from delayed rebalancing has already occurred.
3. Even in a one-way rise, daily rebalancing still has “delayed gains”
This point is especially important.
Some people may think that as long as Hynix keeps rising, 7709 keeps adding exposure after it rises, then it can achieve very good compounding, so rebalancing is not a problem.
But in fact, in a one-way uptrend:
The higher the rebalancing frequency, the higher the return instead.
Because profits can be reinvested earlier.
Take the simplest example.
Suppose Hynix’s day is split into two stages, each stage rising 5% continuously.
Intraday cumulative gain of Hynix:
1.05 × 1.05 − 1 = 10.25%.
Suppose 7709 has NAV 100 in the morning, initial exposure 200, does not adjust all day, and only restores two times leverage near the close.
Then the day’s return is roughly:
10.25% × 2 = 20.5%.
Net asset value goes from 100 to 120.5.
But if, after the first stage’s 5% rise, leverage is immediately topped back up to 2x and then the second stage’s rise is captured, the result becomes:
In the first stage Hynix rises 5%, and the two-times product rises 10%:
100 becomes 110.
The fund immediately restores exposure to 2x.
In the second stage Hynix rises another 5%, and the two-times product rises another 10%:
110 becomes 121.
Final return is 21%.
The same one-way uptrend:
Rebalanced once a day, return 20.5%;
Rebalanced once midway, return 21%.
If rebalanced every half hour, profits can be reinvested earlier, and the final return will move further toward the theoretical result of continuously maintaining two times leverage.
This shows that:
In a one-way uptrend, rebalancing only once a day also creates delayed gains.
It is not that the fund failed to earn two-times returns; rather, it reinvested profits too late, so it did not earn the full two-times compounding.
The same is true for a one-way decline.
The more timely the rebalancing, the earlier the fund can reduce exposure, thereby cutting subsequent losses.
Rebalancing only near the close every day is essentially subject to a double delay:
During the rise, it failed to reinvest profits in time, so it earned less;
During the decline, leverage was not reduced in time, so losses were larger.
So if the rebalance frequency is changed from once a day to once every half hour, the result in a one-way market will be better.
If it could adjust continuously, it would be closest to a truly constant 2x leverage.
4. But the higher the rebalancing frequency, the more severe the losses in choppy markets
The problem is that higher-frequency rebalancing is not free either.
Suppose Hynix rises from 100 to 110 intraday, and then falls back to 100.
In the end, Hynix did not move up or down.
If 7709 does not rebalance intraday and only calculates at the close, the theoretical change in net asset value is close to zero.
But if it re-leverages back to two times at 110, and then Hynix falls back from 110 to 100, it will absorb the later decline with a larger position.
The first stage rises 10%, and NAV goes from 100 to 120.
After topping up to two times leverage near 110, the second leg falls from 110 back to 100, a drop of about 9.09%.
The two-times product’s NAV will become:
120 × (1 − 18.18%) ≈ 98.18.
Hynix ultimately returns to the starting point, but the product loses about 1.82%.
This shows that leveraged ETFs contain an irreconcilable contradiction:
Low rebalancing frequency means more severe return delay and stop-loss delay in one-way markets;
With high rebalancing frequency, in choppy markets it will chase gains and sell into declines more often, resulting in more severe volatility drag, bid-ask spread costs, slippage, and transaction costs.
So rebalancing only once a day does not eliminate this structural problem.
It only does the following:
Delayed losses in trending markets
and
Frequent rebalancing losses in choppy markets
Made a choice between.
5. Why is it like the dynamic hedging of an option seller?
Anyone who has traded options can easily understand this logic.
Suppose a trader sells a large amount of calls and puts, and then continuously delta-hedges.
Because option sellers are usually short gamma:
After the underlying rises, portfolio Delta increases, and the trader needs to buy spot;
After the underlying falls, portfolio Delta declines, and the trader needs to sell spot.
So an option seller’s delta hedging is also:
Buying after the rise;
Selling after a decline.
It is also chasing gains and selling into declines.
When the market keeps oscillating up and down, the seller/trader will keep buying high and selling low; the greater the realized volatility, the larger the Gamma loss from dynamic hedging usually is.
But why can option sellers still make money?
Because he received the option premium upfront.
The option premium includes:
IV, that is, implied volatility;
Theta, that is, time value.
As long as in the end:
Received IV and Theta
Greater than
The realized volatility loss, jump loss, and transaction costs that actually occur,
The seller strategy can make money.
In other words, an option seller’s bearing of short gamma is not free.
The market pays him a volatility risk premium as compensation.
6. 7709’s biggest problem: it bears losses similar to short gamma, but receives no theta
7709 also will:
Adding exposure after the rise;
Reduce exposure after the decline;
Chasing gains and selling into declines repeatedly in a choppy market;
The higher the realized volatility, the more severe the path decay.
So from the perspective of trading flow and path dependence, it has characteristics similar to negative Gamma and negative realized variance.
But 7709 investors do not receive option premium.
No one pays you an upfront IV just because you bear this path risk of chasing gains and selling into declines.
It also has no clear expiration date, and no Theta gradually accrues to you over time.
It is a mechanically rebalanced strategy that runs approximately perpetually.
And it not only receives no volatility premium, it also has to keep paying:
Swap financing costs;
Option costs;
Management fee;
Bid-ask spread;
Rebalancing slippage;
Market impact;
FX conversion and other product fees;
Risk of premium/discount reversion in the secondary market.
So its real structure is closer to:
Two times directional return
Subtract
Realized variance drag
Subtract
Financing costs
Subtract
Derivative costs
Subtract
Management fee
Subtract
Transaction costs.
That is why I think it is inherently negative EV.
7. What exactly does “negative EV” mean here?
I am not saying:
No matter how Hynix rises, 7709 will definitely lose money.
If Hynix has a very strong, very persistent, and very smooth one-way rise, directional gains can of course cover all losses, and 7709 may also make a lot of money.
But that does not mean the product structure itself has positive EV.
People can also win money in casino games, but that does not change the fact that the rules are unfavorable to players in the long run.
By negative EV, I mean:
With the same directional exposure, 7709, relative to an ideal two-times strategy, low-cost perpetuals, or an investor managing leverage themselves, has an extra layer of certain negative carry, path drag, and product fees.
Investors must not only correctly judge that Hynix will rise, but the rise must also be large enough, the trend must last long enough, and the price path must be smooth enough, in order to cover the costs continuously deducted inside the product.
In other words:
Investors not only need to get the direction right, they also need to get the path right.
It is not enough to only look at the final price.
For example, even if Hynix ultimately rises 30%, that does not mean 7709 will necessarily earn 60%.
If there were multiple:
Sharp rise;
Sharp decline;
Rebound;
Fall again;
Even if Hynix eventually returns to a higher level, 7709 may still significantly underperform simple two-times cumulative returns because of daily leverage reset and volatility drag.
8. Why are high volatility and frequent reversals most deadly to it?
Suppose Hynix:
On day one, it rises 10%;
On day two it falls 9.09%.
In the end Hynix returns to the starting point.
But a two-times daily leveraged product:
On day one it rises 20%, and NAV goes from 100 to 120;
On day two it falls about 18.18%, and net asset value drops from 120 to about 98.18.
Hynix ultimately did not lose money, but the leveraged ETF lost about 1.82%.
If this kind of oscillation keeps happening, NAV will keep being eroded.
Every time the market reverses, it punishes the previous rebalance.
So what this kind of product really fears is not just a one-way decline, but:
High volatility;
Extreme swings;
Frequent reversals;
Mean reversion.
And SK Hynix itself is a highly volatile single stock.
Putting a daily leverage reset mechanism on this kind of underlying asset usually causes much more severe long-term path drag than on a low-volatility index leveraged ETF.
9. “Won’t be liquidated” is just a layer of packaging; it does not mean net asset value will not approach zero
Many investors like leveraged ETFs because they seem not to trigger liquidation suddenly at a certain price like perpetual contracts do.
But this merely turns explicit liquidation into implicit NAV decay.
During continuous declines, the fund keeps reducing exposure:
The lower the NAV, the smaller the position;
The smaller the position, the smaller the next absolute loss.
So in many continuous downtrends, it will not end instantly on a liquidation line like an individual margin account.
But its NAV can keep approaching zero.
Falling from 100 to 20 means an 80% loss already.
At that point, it is not enough to recover by rising 80%; it must rise 400%.
So the so-called “won’t be liquidated” is often just:
No clear liquidation moment;
But principal can still approach zero through constant chasing of gains and selling into declines, volatility drag, and fee erosion.
It turns liquidation into a slow process.
10. Why may changing fixed 2x to “up to 2x” not be favorable to long-time investors?
These products later changed fixed two-times leverage into a flexible leverage structure of “not exceeding two times.”
From a risk management perspective, this can reduce:
Daily rebalancing size;
Swap capacity demand;
Market impact;
The speed at which NAV collapses in extreme markets.
After leverage is reduced from 2x to 1.2x or 1.1x, the chasing-buying/selling trades needed will drop sharply.
But for long-time investors who are already deeply underwater, it may create a very awkward structure:
During the decline phase, losses are borne at nearly 2x leverage;
After the market swings violently, the product reduces leverage to 1.1x or 1.2x in order to control risk;
Then even if Hynix rebounds afterward, investors can only participate in the recovery with lower leverage.
That is:
High leverage to absorb declines;
Low leverage to capture rebounds.
This does not mean the manager necessarily has malicious intent.
Reducing leverage does indeed reduce the risk of further declines.
But from the product structure perspective, it also does indeed reduce the ability of heavily trapped investors to recover their principal quickly.
Yet the fund can still continue collecting management fees, and derivatives counterparties can still continue earning financing, swap, or option-related income.
11. Why might perpetuals be more efficient than 7709?
Suppose there exists in the market a:
Enough liquidity;
Funding is reasonable;
Oracle reliable;
No severe premium/discount;
A Hynix perpetual contract with transparent risk management.
Professional investors can at least decide for themselves:
Whether to maintain a fixed position;
Whether to restore two times leverage every day;
Whether to adjust every half hour;
Whether to increase rebalancing frequency when the trend is obvious;
Whether to reduce leverage in choppy conditions;
Whether to stop-loss early;
Whether to add margin;
Whether to hedge the portfolio with other assets.
And 7709 writes all of these decisions into the product rules.
Investors can only passively accept:
When to rebalance;
How much to rebalance;
What the actual target leverage is;
How much Swap to use;
How many options to use;
How much derivatives cost to bear;
When to reduce leverage.
Of course, perpetuals also have:
Funding;
Liquidation;
Exchange credit;
Oracle;
Liquidity;
Risks such as ADL.
So perpetuals are not a free lunch.
But for people who truly know how to manage margin and position size, at least they can control it themselves:
Rebalancing frequency;
Leverage level;
Stop-loss rules;
Financing costs;
Holding period.
Instead of handing all decisions over to a mechanical product rule set.
12. Final summary
7709 is not simply “two times Hynix.”
It is more like:
Two times long beta
Add
Mechanical rebalancing similar to short gamma
Subtract
Realized variance
Subtract
Financing costs
Subtract
Derivative costs
Subtract
Management fee
Subtract
Transaction costs.
Every rebalance is a delayed response to price action that has already happened:
Adding exposure only after the rise;
Reducing exposure only after the decline is over.
In a one-way market, if it rebalances every half hour, it will reinvest profits earlier than if it only rebalanced once a day, and also reduce downside exposure earlier, so performance will be better.
But in choppy markets, the more frequently it rebalances, the more often it will buy high and sell low.
So it faces a structural dilemma that cannot be completely escaped:
Rebalance slowly, absorb delayed losses;
Rebalance quickly, absorb volatility drag.
More importantly, it bears the chase-buy/sell dynamics similar to an option seller’s dynamic hedging, but without receiving the IV and Theta compensation that an option seller should receive.
The only compensation it can rely on is that Hynix will have a sufficiently strong, sufficiently persistent, and sufficiently smooth upward trend in the future.
So it is not a product that “loses money every day.”
But it is a negative-EV product that inherently carries negative carry, variance drag, delayed rebalancing, and high holding costs.
Investors must not only judge direction correctly, but also judge:
Trend persistence;
Volatility;
Price path;
Rebalancing frequency;
Financing costs;
Swap and option costs;
Secondary market premium/discount.
For ordinary investors, it is already hard enough to judge direction correctly in the long run, let alone judge so many variables at the same time.

So-called “won’t be liquidated” just hides liquidation risk inside a process of continuously declining NAV.
Looking safer does not mean the structure is more cost-effective.
Even if your directional judgment is correct, that does not mean you should choose the tool with the highest cost, worst path, and least control.