The government has decided to impose individual investment limits on single-stock leveraged exchange-traded funds (ETFs). A proposal is being discussed to restrict total investment to within 20% of an individual's total assets. The minimum deposit requirement will also be raised from 10 million won to 30 million won, alongside measures to strengthen simulated trading and transaction costs, as well as adjustments to leverage in emergency situations. Although these measures are late, they are necessary.
Single-stock leveraged ETFs aim to double the daily returns of specific stocks. While they can amplify gains when stock prices rise, they also double losses when prices fall. When significant funds flow into major stocks like Samsung Electronics and SK Hynix, the impact on individual stocks can ripple through the entire market. Despite this, authorities allowed the product to be launched in May without adequately considering the concentration and high volatility of the domestic stock market.
The market capitalization of these ETFs ballooned from 4.4 trillion won at launch to 11.9 trillion won by mid-July. The combined weight of Samsung Electronics and SK Hynix in the KOSPI index also rose to 52%. Although the warning signs were clear, the authorities' response was limited to halting new listings and raising deposit requirements. It was only after the stock market experienced a sharp decline that they introduced individual total investment regulations.
In this context, the remarks by Kim Yong-beom, head of the Presidential Policy Office, are disappointing. He stated that the recent market volatility is not solely due to single-stock leveraged products, noting that the high proportion of individual investors and their 'dynamic investment' behavior, along with the structure of derivative products, contribute to increased volatility. He added that the recent decline is not unique to South Korea, citing uncertainties in AI investment profitability and competition in the Chinese semiconductor industry as contributing factors.
While it is true that there are multiple causes, it is not the responsibility of the authorities to emphasize this point first. Investors have merely traded products that the government allowed. The responsibility to foresee demand for high returns and potential concentration, and to establish safety measures, lies with the authorities. Failing to reflect on this and mentioning 'dynamic investors' can give the impression that the responsibility for systemic design is being shifted to individuals. What is needed now is not an assessment of investor behavior, but an examination of whether risk verification was sufficient and why mechanisms to prevent market shocks did not function.
The government's decision to establish legal grounds for individual investment limits, excessive trading costs, simulated trading, and emergency market stabilization measures is a welcome, albeit belated, step. However, merely adding regulations each time a crisis occurs is insufficient. Continuous monitoring of trading volumes and the impact on the spot market is necessary, along with ongoing improvements to market stabilization measures to reduce excessive concentration and volatility.
The responsibilities of securities firms and asset management companies in sales and explanations must also be strengthened. Marketing that highlights only short-term returns should be curtailed, and the risks of losses and long-term holding should be repeatedly communicated. While individual responsibility is important, it is unacceptable to shift the risks created by an imperfect system onto individuals.
The dynamism of capital markets should not be blamed but rather recognized as a reality that the system must accommodate. Authorities should focus on correcting poorly designed systems rather than admonishing investors. Trust in the market is restored not by evading responsibility, but by acknowledging mistakes and implementing measures to prevent recurrence.
* This article has been translated by AI.
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