Original Author: Zhang Yaqi

Original Source: Wall Street Watch

The South Korean single stock leveraged ETF market is currently experiencing a crisis among retail investors. Following severe fluctuations in the stock market, a large number of individual investors have sunk deeper into the crisis while trying to average down their costs through repeated additional purchases, with account losses typically exceeding 50%. The root of this crisis lies in a hurriedly launched policy product by financial authorities two months ago aimed at curbing capital outflow.

On July 28, both major South Korean stock markets triggered a circuit breaker on the same day, leading to a sharp deterioration in market sentiment. The Korea Composite Stock Price Index (KOSPI) fell below 6000 points for the first time in over three months. Against this backdrop, the cumulative transaction volume of "KODEX SK Hynix Single Stock Leveraged" and "SOL SK Hynix Futures Single Stock Inverse 2X" products has now exceeded 139 trillion won this month, surpassing the total market transaction volume of the Korean KOSDAQ (113 trillion won) by over 26 trillion won. The Financial Services Commission of Korea announced that if market demand does not cool down, it will consider further raising investment thresholds or establishing individual investment limits.

The direct victims of this turmoil are tens of thousands of ordinary retail investors. On July 16, the Financial Services Commission of Korea raised the basic margin requirement for related products from 10 million won to 30 million won, but trading enthusiasm has not waned—on the day of the announcement, single stock leveraged products accounted for as much as 36.6% of total ETF transaction volume, and this has continued to remain in the range of 37% to 43%. Criticism has also heated up, with some viewpoints suggesting that authorities were seriously negligent in the product approval process, and there have been calls to initiate state compensation procedures.

Retail Investors Trapped in Margin Call Dilemma, Losses Are Shocking

Brutal loss cases from individual investors have emerged intensively online.

45-year-old office worker Kim started with 7 million won, investing in SK Hynix and Samsung Electronics single stock leveraged ETFs. Whenever stock prices fell, he would buy more under the rationale that "lowering the average price helps recover the cost," having averaged down five times, with total investment swelling to 34 million won, while his current floating loss has exceeded 50%. "To recover the cost, I kept buying more, only to sink deeper; now I can't sell or buy," he said.

25-year-old university student Choi has a similarly typical experience. He entered the market with 8 million won saved from part-time work and, after the semiconductor stocks dropped, borrowed money for living expenses to buy more single stock leveraged ETFs; ultimately, his account is left with only about half of the principal. "The speed at which the losses expand is much faster and crueler than when I profit," he said.

On the anonymous workplace community "Blind", a bank worker posted that his investment portfolio starting at 2 billion won once appreciated to 7 billion won, concentrating holdings in Samsung Electronics, SK Hynix’ common stock, and single stock leveraged ETFs, only to shrink to about 2.2 billion won within a month; Yeo Kyung-ok, a Chinese chef who won a real trading competition with a 750% return, also publicly shared his SK Hynix leveraged ETF account—approximately 120 million won in principal is now valued at only 46 million won, with a floating loss of about 74 million won, or a loss rate of 61.38%.

Structural Risks of Leveraged Products Are Underestimated

The product mechanism of leveraged ETFs is the core reason for the continuous expansion of losses.

Such products track twice the daily return rate of the underlying asset. If the underlying asset rises unilaterally, profits can be magnified; however, in alternating bullish and bearish conditions, the "negative compounding" effect will lead to the continued accumulation of losses—even if the underlying asset ultimately returns to its original point, leveraged ETFs often cannot recover their losses.

Bae Jae-kyu, president of Korea Investment Management, recently publicly warned: "If the underlying stocks continue to fluctuate violently like now, leveraged ETFs will continue to accumulate losses daily. Even if the underlying stocks later return to their original positions, ETF prices are unlikely to return." He bluntly advised investors, "Even now, do not invest in individual stock leveraged ETFs."

From an industry perspective, the concentrated pursuit of a single theme by retail investors also amplifies the structural weakness of losses. The "RISE Donghak Ant" ETF, which tracks domestic retail buying trends, has only risen about 13% this year, while the RISE KOSPI ETF has increased by about 58% during the same period; the "KODEX American Donghak Ant" ETF, which tracks overseas retail holdings, has fallen 2.7% this year, while the KODEX American S&P 500 ETF has risen 11.2%. Park Seung-jin, an ETF researcher at Hana Securities, pointed out that individual investors have a strong risk appetite and tend to prioritize momentum and trends when selecting stocks, leading to significant retracements when market conditions reverse.

Controversy Over Hurried Product Launch and Calls for "State Compensation"

The policy background of this crisis is also heavily controversial.

The aforementioned single stock leveraged ETFs were launched on May 27, with the official goal of alleviating high exchange rate pressures, curbing capital outflows, and activating the domestic stock market. However, after the product was launched, massive amounts of capital quickly concentrated on specific stock leveraged products, and the mechanical rebalancing operations before daily close amplified stock price volatility, leading to concerns among market participants about the "short gamma" effect. Reportedly, the net assets of the related products had reached 16 trillion won by the end of June, with one day's trading volume peaking at 14 trillion won.

In response to the chaotic situation, the head of the Financial Supervisory Service, Lee Chan-jin, previously stated: "Now I regret it; at that time, I should have done everything possible to block (the approval of the securities declaration)." This statement is seen by the public as a de facto admission of regulatory errors in approval.

Critics argue that authorities hurriedly advanced the process without fully assessing market impacts and risk control mechanisms, leading many retail investors to suffer serious asset losses; some viewpoints have explicitly proposed initiating a state compensation accountability mechanism for regulatory negligence and called for the parliamentary administrative committee to pursue accountability in the product approval process through inquiries and investigations. National Power Party legislator Kim Eun-hye stated that they are currently widely collecting opinions from affected investors and hope for a swift improvement in the situation.

Regulatory Authorities Intervene, Follow-Up Control Measures Awaited

Financial authorities have clearly stated that they will tighten regulations further, but the specific measures are still under observation.

The ruling party's Democratic Party of Korea K-Capital Market Special Committee held a closed-door meeting with securities and asset management companies on July 27, deciding to prioritize observing the actual effects of existing measures such as raising the basic margin to 30 million won before deciding whether to push for additional regulation. The committee noted that they do not currently consider mandatory delisting or reducing leverage ratios but reserve the option to take further actions depending on market conditions.

On July 28, the chairman of the Financial Services Commission, Lee Eok-won, met with representatives from securities and management companies and clearly stated, "If market demand does not adequately cool, we will consider further raising investment conditions or setting individual investment limits as additional measures," and promised to continuously develop plans that help reduce market volatility and strengthen investor protection.

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