South Korean retail investors have suffered steep losses on leveraged Samsung and SK Hynix exchange-traded funds, with the KODEX SK Hynix Single Stock Leverage ETF plunging approximately 70% from its June peak, according to LSEG data reported by CNBC on July 20.
The collapse has exposed the risks inherent in leveraged ETFs — products designed to amplify daily returns. The SK Hynix leveraged ETF is down roughly 50% since its May 27 launch, even as the underlying semiconductor stocks have declined far less.
Since the debut of single-stock leveraged ETFs in May, Korean retail investors have purchased a net 14 trillion won ($9.4 billion) of them, compared with roughly 2 trillion won by foreign investors, according to KB Financial Group data cited by CNBC. Samsung Electronics and SK Hynix shares themselves fell 24.3% and 19.5%, respectively, in the month to July 16, according to Chosun, yet the leveraged ETFs tracking them have lost much more.
Leveraged ETFs are designed to deliver twice the daily move in their underlying stock. This daily rebalancing mechanism — resetting exposure at the end of each trading day — creates a compounding effect that erodes returns in volatile markets, according to sources on how these products work. When a stock rises 1% one day and falls 1% the next, the underlying stock ends where it started, but a 2x leveraged ETF tracking it loses value because the losses compound on a smaller base after the first day’s gains are locked in.
The pain has been acute for retail traders. South Korean online forums filled with despair after SK Hynix’s record single-day plunge last week. “I want to go back to before I started investing in stocks. Give me my money back,” one investor wrote on a trading forum, according to CNBC. “You’re determined to kill me,” another said.
Analysts say the losses highlight how leveraged ETFs have become vehicles for speculation rather than long-term investing. “The investors bearing the losses are overwhelmingly domestic retail investors,” said Jung In Yun, founder of Fibonacci Asset Management, in comments to CNBC. Many buyers are not novice traders but investors in their 40s and 50s who have grown increasingly comfortable with leverage and concentrated technology bets, he added.
South Korea’s central bank warned in a report released in June that leveraged stock investment by retail investors had climbed to a record high, driven primarily by margin borrowing and increasingly concentrated semiconductor positions. While the central bank said the buildup was unlikely to pose a systemic threat to the financial system, it cautioned that leverage could magnify volatility during market corrections, particularly if fear of missing out encourages investors to chase rallies with borrowed money.
Regulatory Response Tightens Rules
Regulators have moved quickly to rein in the speculative boom. On July 16, South Korea announced tougher rules for single-stock leveraged ETFs, according to Reuters. The minimum cash balance required to trade the products will rise to 30 million won ($20,300) from 10 million won, taking effect around August 5. Under the new rules, only cash counts toward the requirement — stocks, funds, and other securities are no longer accepted, according to sources reporting on the regulation.
South Korea’s Financial Services Commission also suspended approval of new single-stock leveraged ETF listings and required retail investors to complete additional risk-education courses before trading the products, according to reporting by multiple outlets.
Peter Kim, head of global investment strategy at KB Financial Group, told CNBC that the losses highlight how single-stock leveraged ETFs have become a vehicle for speculative trading. “There are no signs of massive bailout of the market by the Korean retail investors, but if the overhang over the ETFs and should the slump and volatility persist, it could lead to a prolonged slump,” Kim said.
Some market veterans argue the unwinding has further to run. Thomas J. Hayes, chairman and managing member of Great Hill Capital, said memory-chip stocks have become the market’s most crowded trade for both institutional and retail investors. “Semis and memory is the most crowded global trade by institutional and retail positioning. It’s over,” Hayes told CNBC, predicting that major cloud providers would moderate their capital spending guidance in coming earnings reports, triggering a broader exit from semiconductor and memory stocks.
Sources
- CNBC — reported the KODEX SK Hynix Single Stock Leverage ETF’s 70% decline from June peak and 50% decline from debut; KB Financial Group data on retail investor purchases of 14 trillion won; investor sentiment and commentary from Jung In Yun and Peter Kim.
- Reuters — reported South Korea’s regulatory announcement raising minimum cash requirement to 30 million won and suspension of new leveraged ETF listings.
- Chosun — reported Samsung Electronics and SK Hynix share declines of 24.3% and 19.5% respectively from May 16 to July 16.
- KB Financial Group — provided data on retail versus foreign investor purchases of leveraged ETFs since May 27 launch.
- South Korea’s central bank — warned in a June report of record-high leveraged stock investment by retail investors and concentrated semiconductor positions.
- REX Shares and GraniteShares — explained how leveraged ETFs deliver 2x daily returns and how daily rebalancing creates volatility decay.
