Retail investors face losses as leveraged ETFs cause KOSPI volatility

South Korean retail investors are facing a financial rollercoaster, with many experiencing substantial losses from leveraged Exchange Traded Funds (ETFs) that track single stocks, particularly Samsung Electronics and SK Hynix. Since the launch of 14 such ETFs on May 27, which aim to double the daily returns of these semiconductor giants, the KOSPI market has been thrown into turmoil. The extreme volatility has triggered trading curbs like sidecars multiple times a day.

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I invested 1 million won in a leveraged product because I didn't have enough money to buy SK Hynix. I've been nicknamed 'the peak predictor' among my friends.

International media, including The Wall Street Journal, has pointed to these leveraged ETFs as a significant factor behind the KOSPI's wild swings. The report noted that while similar funds exist in the U.S., their scale in Korea is disproportionately large compared to the underlying assets. The combined market capitalization of single-stock leveraged ETFs for SK Hynix alone reaches approximately 9 trillion won, surpassing even the Nvidia leveraged ETF in the U.S., despite Nvidia's market cap being four times larger. This intense focus on leveraged investments in Korea underscores a fervent, and potentially risky, appetite among investors.

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I was worried about being left out of the semiconductor rally, so I bought leveraged ETFs for both companies. I sold them all recently. The decisive factor was when Samsung Electronics' stock plummeted by 12.31% in a single day, causing the leveraged ETF to drop by nearly 24%.

Investors like a 20-something identified as 'A' and a 30-something 'B' have shared harrowing experiences. 'A' invested 1 million won in an SK Hynix leveraged ETF, only to be nicknamed 'the peak predictor' among friends after incurring losses. 'B', who had previously invested in S&P500 ETFs, felt left out of the semiconductor rally and bought into the leveraged ETFs, only to see his investment plummet by nearly 24% in a single day when Samsung Electronics' stock dropped 12.31%. Many investors are holding onto these leveraged ETFs despite significant losses, hoping for a market rebound, a strategy that can exacerbate losses due to the 'negative compounding effect' where price fluctuations lead to cumulative losses.

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The market players have no real benefit, and only the systems managing and operating them profit. I personally have serious concerns about this.

The controversy is further fueled by the substantial fees charged by the ETFs, which range from 0.6% to 1.0% annually, three to five times higher than typical ETFs. This means that securities firms and asset managers profit regardless of investor outcomes. Financial authorities have expressed serious concerns, with Financial Services Commission Chairman Lee Bok-hyun stating his worry about systems that profit while market participants do not. The situation has escalated to the point where some politicians are calling for the delisting of these products, with Ahn Cheol-soo, a member of the ruling People Power Party, advocating for strong corrective measures, including potential delisting, to stabilize the market.

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Leveraged 'Samseonik' (Samsung and Hynix) is a complete policy failure. Strong corrective measures, including delisting, are needed for market normalization.