Following recent market volatility in South Korea, single-stock leveraged ETFs have once again become a focal point of regulatory discussion. Foreign media commentary suggests that these products further amplify retail investor risk, as holders may sustain losses over time due to product structure—even if the underlying stock eventually returns to its original price—and the SEC should use this opportunity during its current rule review to directly ban such products.
South Korea attracted $9.4 billion in two months.
The article mentions that South Korean regulators approved a single-stock leveraged ETF tracking Samsung Electronics and SK Hynix approximately two months ago. These products provide investors with 2x exposure to price movements and were originally designed to attract domestic capital back to the Korean market from similar U.S.-based products.
Funds flowed in rapidly. Within less than two months, Korean retail investors poured approximately $9.4 billion, equivalent to about 14 trillion Korean won, into these funds. However, the timing of the product launch was unfortunate. Two major semiconductor stocks had already surged significantly earlier in the year, followed by a cooling of global market enthusiasm for AI-related trading, while Chinese competition began to undermine expectations of SK Hynix’s competitive advantage in the AI chip sector.
During the tech stock correction, SK Hynix and Samsung fell by 14.7% and 13.4% respectively in a single day. Due to the concentrated weighting of the Korean stock market, this decline also dragged down the KOSPI index and triggered multiple trading halts.
Daily rebalancing amplifies losses
The article argues that the real issue is not leverage itself, but how these ETFs operate. To maintain a daily 2x exposure, fund issuers must rebalance their positions after market close: buying more when prices rise and selling more when prices fall, thereby amplifying volatility.
According to calculations by Han Yang Securities in South Korea, from May 27 to July 22, the stock prices of Samsung and SK Hynix fell by 15.2% and 18.4%, respectively, while the corresponding leveraged ETFs declined by 40.2% and 49.4%, significantly exceeding the declines of the underlying stocks.
The article further points out that these products are also subject to "volatility decay." This occurs because the fund tracks daily returns rather than the cumulative return since the investor's initial purchase. In a volatile market, even if the underlying stock price returns to its starting level, the ETF's net asset value may still fail to recover.
Han Yang Securities simulation suggests that if similar volatility persists for a year, even if Samsung and SK Hynix return to their original prices by year-end, the related leveraged ETFs could still decline by 63% to 75%.
Similar products in the United States are also under pressure.
The article states that South Korea's这批 products are modeled after single-stock leveraged ETFs in the U.S. market. Similar products tracking tech stocks such as NVIDIA, Tesla, and Microsoft are already available in the U.S., and investors can purchase them directly through platforms like Robinhood.
As of June this year, the assets under management for these products in the U.S. had reached approximately $65 billion, with about 90% of trading coming from retail investors. The performance of some products has also shown similar issues: an ETF offering 2x exposure to Tesla declined 51% over the past six months, while Tesla’s stock fell approximately 20% during the same period; another ETF providing 2x exposure to Microsoft fell nearly 12% this year, even though Microsoft’s stock has risen approximately 2% overall after a recent rebound.
The article argues that the SEC has long been aware of these risks. In June 2023, the SEC’s Investor Advisory Committee noted that individual stock leveraged ETFs are primarily held by retail investors, many of whom do not understand the deviation risks caused by compounding and daily rebalancing.
Currently, the SEC is reviewing ETF rules, with a public comment period open until early September, explicitly covering single-stock strategies and higher-leverage products. The article suggests this is precisely the window for the SEC to directly intervene and restrict such products.