South Korean retail investors, undeterred by previous heavy losses, are once again pouring money into high-risk single-stock leveraged ETFs, with a particular focus on SK Hynix. This trend is occurring despite regulatory measures implemented in July to curb speculative trading, which included tripling the minimum cash requirement for these products from $2,100 (3 million won) to $21,000 (30 million won). Foreign investors have also reportedly increased their exposure to these ETFs, though at a significantly lower volume compared to retail traders.
Since their launch on May 27, South Korean retail investors have purchased a net $9.4 billion (14 trillion won) worth of single-stock leveraged ETFs, dwarfing the approximately $1.3 billion (2 trillion won) bought by foreign investors. The KODEX SK Hynix Single Stock Leverage ETF, designed to deliver twice the daily movement of SK Hynix shares, has seen a dramatic fall of approximately 70% from its June historical high and is down about 50% from its initial offering. This significant decline was mirrored by a 47.5% drop in the leveraged ETF between May 27 and July 16, even as the underlying SK Hynix shares fell only 17.9% over the same period, illustrating the amplified losses due to volatility drag.
The renewed speculative activity has raised concerns among financial authorities and market experts. Peter Kim, head of global investment strategy at KB Financial Group, stated that these ETFs are being used for speculative trading rather than long-term investment. Jung In Yun, founder of Fibonacci Asset Management, pointed out that the losses are overwhelmingly borne by domestic retail investors. Regulators also banned new listings of leveraged ETFs linked to individual stocks, in addition to the increased margin requirements. Some experts, like Bae Jae-kyu, CEO of Korea Investment Management, have even urged investors to exit these products, warning that even if the underlying stock recovers, the leveraged ETF may not due to compounding losses from volatility.
This trend is occurring amidst a broader context of high leverage among South Korean retail investors. Margin loan balances in the domestic stock market reached a record $26 billion (38.63 trillion won) on June 24, though they eased to $23 billion (34.37 trillion won) by July 15. Total investor borrowing, including other forms of debt, exceeded $40 billion (60 trillion won) at the end of May, according to the Bank of Korea. Oxford Economics noted that leveraged Korea-focused ETFs accounted for about 30% of assets in the country's 25 largest leveraged funds by June, up from roughly 15% at the start of the year, leading them to downgrade South Korean equities to "neutral" due to increased leveraged positioning.
