Single-Stock Leveraged ETFs Face Decline After Initial Surge

This year, single-stock leveraged and inverse exchange-traded funds (ETFs) that heated up the stock market are now on a path toward decline. Despite an explosive influx of investor funds during the semiconductor rally, these funds have been labeled as a source of volatility, leading to a rapid cooling of investor enthusiasm. Returns have plummeted, and trading volumes have dropped sharply. What transpired in the 100 days since the launch of single-stock leveraged ETFs?

According to the Korea Exchange, single-stock leveraged ETFs were suddenly approved on May 27. Investors showed strong interest in these funds, which track the daily returns of specific stocks like Samsung Electronics and SK Hynix rather than an index. Within just two weeks of their launch, the market capitalization of 16 products doubled.

The total assets under management (AUM) for the 16 single-stock leveraged ETFs surged, peaking at 16.1954 trillion won on June 22, a record achieved in less than a month since their launch. Trading volume also skyrocketed, reaching 10.418 trillion won on the first day of trading, and soaring to 19.4429 trillion won by June 22. At one point, daily trading volume approached 20 trillion won, indicating a heated market.

However, the excitement lasted less than two months. Extreme volatility, with daily fluctuations of up to 40%, raised concerns about a 'whipsaw' effect. Additionally, semiconductor stocks faced corrections starting in July, exacerbating the price swings of the leveraged ETFs. In fact, the stock prices of Samsung Electronics and SK Hynix, the underlying assets of these ETFs, dropped by 27.7% and 43.6%, respectively, from the market's peak on June 22 to July 4.

In response, the government belatedly implemented regulations at the end of July. Following the increase of the minimum deposit requirement from 10 million won to 30 million won, trading volume fell to 3.1518 trillion won on July 31. By August 4, it had shrunk to 498.4 billion won, just one-twentieth of the initial trading volume. AUM also began to decline, with the total for the 16 ETFs dropping to 6.2178 trillion won as of August 4, a 61.7% decrease from the peak.

Returns have also deteriorated sharply. As of August 4, the average return for the 16 listed products was -57.61%. The eight products based on Samsung Electronics saw average losses in the -50% range, while those based on SK Hynix all fell below -55%. The product with the largest loss, 1Q SK Hynix Futures Single-Stock Leveraged ETF, plummeted to -68.67%. Inverse products also suffered losses, with SOL SK Hynix Futures Single-Stock Inverse 2X at -55.12% and PLUS Samsung Electronics Futures Single-Stock Inverse 2X at -48.92% returns.

Currently, access to single-stock leveraged ETFs is extremely limited for investors. A minimum deposit of 30 million won is required, along with mandatory pre-training and simulated trading. Starting this month, the trading unit will expand from one share to 20 shares. Individual investors without substantial capital will find it difficult to participate. The financial investment industry has noted that the regulatory approach for single-stock leveraged ETFs is similar to the past efforts to stabilize the equity-linked warrant (ELW) market, which now barely survives after various regulations.

A financial industry official stated, "Rather than eliminating the product, the approach is to gradually raise the investment threshold, which is very similar to the ELW regulations. As regulations accumulate, the trading volume of single-stock leveraged ETFs will naturally shrink."