The average daily trading volume of domestic exchange-traded funds (ETFs) in South Korea, which approached 40 trillion won at the end of June, has halved in just two months. The net buying by individual investors has also plummeted to one-tenth of its previous level. Analysts suggest that rather than a cooling of interest in ETF investments, the decline is largely due to a normalization of short-term trading that had overheated following new regulations on single-stock leveraged products.
According to the financial investment industry on October 2, the average daily trading volume in the domestic ETF market reached a record high of 38.08 trillion won in June but has since been on a downward trend. It fell to 33.29 trillion won in July and further dropped to 17.61 trillion won in August. Compared to June, the trading volume has decreased to less than half in just two months. Even in September, the average daily trading volume remained in the 16 trillion won range until mid-month, continuing the slowdown.
The buying momentum from individual investors has also noticeably weakened. In June, individuals recorded a net purchase of 24.67 trillion won in ETFs, setting an all-time high, but this figure dropped to 8.79 trillion won in July and further to 2.38 trillion won in August. In just two months, the net buying amount has fallen below one-tenth of its previous level.
At first glance, it appears that the 'ETF boom' that heated up the first half of the year has come to an end. However, many in the market view the recent trading contraction not as a sign of stagnation in the ETF market itself, but rather as a process of normalizing previously overheated trading.
The primary reason for this shift is the single-stock leveraged and inverse ETFs based on Samsung Electronics and SK Hynix.
Since July 31, financial authorities have raised the basic deposit requirement for single-stock leveraged and inverse products from 10 million won to 30 million won in cash. They have also mandated that investors complete simulated trading before entering these products, effectively raising the barrier to entry.
The impact of these regulations was immediate. According to the Korea Exchange, the average daily trading volume of 16 single-stock leveraged and inverse ETFs based on Samsung Electronics and SK Hynix plummeted by 92%, from 12.25 trillion won in the month before the regulations to 9.9 trillion won in the month after.
Focusing solely on the 14 leveraged ETFs, the average daily trading volume dropped from 8.64 trillion won to 800 billion won, a decrease of 91%. The two inverse 2X ETFs also saw a significant decline, from 3.6 trillion won to 190 billion won, a 95% drop.
Trading turnover has also sharply decreased. The average turnover rate for the 14 single-stock leveraged ETFs fell from 43.6% before the regulations to 5.9% afterward. The turnover rate for the inverse 2X ETFs dropped from 1,110.4% to 125.0%.
As a result, the disappearance of short-term trading in high-risk products that had driven the overall ETF trading volume in the first half of the year has led to a decline in the market's total trading volume. In fact, prior to the launch of single-stock leveraged ETFs in April, the average daily trading volume for ETFs was 16.54 trillion won. Considering that the trading volume returned to the 17 trillion won range in August, the current trading scale is similar to levels before the rapid expansion of the ETF market.
However, this does not mean that individual investors have abandoned ETFs altogether. Individuals have recorded net purchases of ETFs for 32 consecutive months up to August. Since December 2023, the total net purchases by individuals have reached 128.4 trillion won. The cumulative net purchase amount from January to August this year has also reached 73.72 trillion won.
Investment targets are also changing. Some of the funds that exited single-stock leveraged products have shifted to U.S. indices and dividend-covered call ETFs. For instance, the TIGER U.S. S&P 500 ETF recorded a net purchase of 4.86 trillion won by individuals from the beginning of the year until September 28, making it the top performer among domestic listed ETFs. In the second half of the year alone, 1.67 trillion won has flowed in, with 447.4 billion won net purchased in the past month.
Funds are also moving into covered call products. From November 11 to 18, approximately 112.2 billion won flowed into the TIGER Dividend Covered Call Active ETF, while KODEX 200 Covered Call Active and KODEX 200 Target Weekly Covered Call saw inflows of about 85.9 billion won and 65.8 billion won, respectively.
As a result, the securities industry believes it is premature to conclude that the recent decline in ETF trading volume indicates a structural contraction in the market. A securities industry official stated, "Instead of a reduction in short-term high-risk trading centered on single-stock leveraged products, investment demand is being diversified into representative indices and income-generating products."
However, it remains to be seen whether the reduced demand for high-risk investments due to regulations will lead to a 'balloon effect,' where funds shift to unregulated products such as overseas leveraged ETFs. Following the tightening of regulations on domestic single-stock leveraged products, there has been a noticeable trend of domestic investors concentrating their buying power on U.S. AI-related 3X leveraged ETFs.
A securities industry official remarked, "The recent decline in ETF trading volume can be viewed as a normalization of excessive short-term trading centered on single-stock leveraged products rather than an exodus of investors from the ETF market. Individual funds are moving into various products such as U.S. indices and covered calls, indicating that the demand for ETF investments remains robust."
* This article has been translated by AI.
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