South Korean investors lose 32% on average in leveraged ETFs despite 5 trillion won investment

South Korean retail investors have significantly increased their investment in single-stock leveraged exchange-traded funds (ETFs), pouring 5.19 trillion won into these products between June 23 and July 8. This surge in investment occurred despite a volatile market where the KOSPI index experienced sharp drops, including three days where circuit breakers were triggered. The volume of investment more than doubled compared to the previous period.

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Individual investors are continuing to buy in an attempt to recover their paper losses.

However, this aggressive investment strategy has yielded dismal results. Data from the Korea Securities Depository shows that the average return for the 14 single-stock leveraged products invested in during this period was a staggering -32.30% as of July 8. For instance, an investment of 10 million won could have depreciated to as low as 5.91 million won, depending on the specific product. Even leveraged products tracking major stocks like Samsung Electronics and SK Hynix saw average losses of -24.26% and -40.33% respectively, significantly underperforming the underlying stocks.

The stark reality is that a vast majority of these investors are in the red. Analysis by Korea Investment & Securities based on customer accounts revealed that 100% of investors holding the KODEX SK Hynix Leveraged ETF, the largest by net asset value, were experiencing losses. Similarly, 99% of investors in the KODEX Samsung Electronics Leveraged ETF were also at a loss.

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In such a scenario, investment in technology-intensive sectors could retrench abruptly, and frothy equity valuations, particularly in AI-exporting economies and markets with high concentration in technology firms, could correct sharply.

Market analysts are urging caution. Kim Seok-hwan, a researcher at Mirae Asset Securities, noted that individual investors are continuing to buy in an attempt to recover their paper losses. However, securities firms are advising a reduction in leveraged investments due to extreme market volatility. Roh Dong-gil of Shinhan Investment Securities recommended a strategy of reducing leverage while maintaining core holdings in the spot market. Yuanta Securities even published a report questioning the reasons behind Korea's sharp market fluctuations, attributing it to single-stock leveraged products and calling for institutional improvements to reduce volatility.

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The reasons for Korea's sharp market fluctuations are single-stock leveraged products, which are prominent in individual investor net purchases and KOSPI trading volume. Since individual net purchase capacity cannot be expanded indefinitely, institutional improvements are urgently needed to reduce volatility.