Speculative frenzy in single-stock leveraged products cools after regulatory crackdown

South Korea's financial markets are showing signs of cooling speculative investment, particularly in leveraged exchange-traded funds (ETFs), following the implementation of regulatory measures targeting single-stock leveraged products. A week after the Financial Services Commission (FSC) raised the minimum deposit requirement for these products from 10 million won to 30 million won, the trading volume in the single-stock leveraged ETF market has plummeted.

On July 7th, the trading value for 16 types of single-stock leveraged ETFs, including inverse 2x products, stood at 845.2 billion won. This is a dramatic decrease from the 12.44 trillion won recorded on June 30th, just before the new regulations took effect. The reduction highlights the immediate impact of the policy change on highly speculative trading.

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While the concentration on a few stocks has eased due to the implementation of measures for single-stock leveraged products, the influence of these products has not entirely disappeared, and volatility remains during downturns.

While the overall leveraged ETF market experienced a slowdown, the impact was most pronounced in single-stock leveraged products. Other leveraged ETFs, which track broader indices rather than specific stocks, saw a more modest decline in trading volume. The 48 types of these ETFs traded 2.94 trillion won on July 7th, a decrease of only about 100 billion won from June 30th. This suggests that while speculative fervor has generally subsided, the core demand for leveraged products tracking diversified assets remains relatively stable.

Furthermore, indicators of 'debt-to-invest' (bitu) behavior, such as credit loan balances, have also decreased. The credit loan balance, which stood at 32 trillion won at the end of June, has hovered between 27 and 28 trillion won since the regulations were introduced, returning to levels seen in January. The KOSPI 200 Volatility Index, often called the 'Korean Fear Index,' has also retreated from its mid-June peak of 96.94 to around 75.59. Despite these calming trends, market volatility persists, particularly influenced by the semiconductor sector, with SK Hynix and Samsung Electronics experiencing significant price fluctuations.

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Following the stabilization of semiconductor supply and demand and volatility, semiconductors are expected to re-establish themselves as leading stocks, leading to the concurrent rise of undervalued and neglected stocks relative to their earnings.