The controversy surrounding single-stock leveraged exchange-traded funds (ETFs) continues. President Lee Jae-myung urged financial authorities on July 21 during a Cabinet meeting to "swiftly and thoroughly create supplementary measures." This call comes in light of the Financial Services Commission's announcement on July 16 to raise the minimum deposit from 10 million won to 30 million won, recognize only cash as a deposit, and increase the trading unit from one share to 20 shares. However, the implementation of these measures has been postponed until next month, prompting the President to deem this delay unacceptable.
It remains unclear what additional measures will be introduced. Nevertheless, the trend of individual investors flocking to the two-times leveraged ETFs tracking Samsung Electronics and SK Hynix has not changed since the July 16 announcement. Critics argue that the measures announced on July 16 are more about "raising the threshold" than providing fundamental solutions, labeling them as stopgap measures.
In reality, raising the deposit and expanding trading units will not eliminate the structural volatility of leveraged ETFs. The core issue with these products lies not in the number of individual investors but in the large-scale buying and selling of underlying assets and the concentration of trading at closing prices. Simply raising the entry barrier could push small investors out of the market, leaving only those with substantial capital to continue trading. This could undermine the equity of investment opportunities under the guise of investor protection.
A more significant concern is that financial authorities have fallen into a dilemma of their own making. Single-stock leveraged ETFs were initially introduced to redirect funds from overseas leveraged products back into the domestic market by easing regulations. The belief was that prohibiting investments allowed in the U.S. and Hong Kong would exacerbate capital outflows. However, if authorities now propose to lower leverage ratios or encourage delisting, it would represent a self-negation of policy. This could lead to a balloon effect, where investment demand does not disappear but shifts back to overseas products.
As a result, the market is calling for a more structural approach. A realistic alternative is to change the hedging methods. Domestic leveraged ETFs face strict regulations on derivatives, forcing them to buy and sell large amounts of underlying assets directly. By improving regulations to allow for a higher proportion of hedging using futures and options, the concentration of trading at closing prices could be significantly alleviated. This is not a measure that restricts trading but rather an institutional improvement that reduces market shocks.
There is also a need to revise the method of calculating closing prices. It may be worth considering changing the management of deviation rates and hedging standards from a single closing price to an average price over a set period. This could help naturally disperse the phenomenon of concentrated trading at the end of the trading day.
The government's role should not be to make investment itself more difficult but to improve trading structures to prevent excessive market fluctuations. There are numerous alternatives that can reduce volatility while maintaining market functionality, such as expanding single-price trading, average price calculations, and easing regulations on derivatives. Investor protection and market efficiency are not conflicting values but goals that should be pursued together.
Above all, policies must be consistent. If a product introduced as necessary is effectively neutralized within just a few months, the market will find it hard to trust government policies. Regulations should not be a means to outsmart the market but rather a mechanism to ensure it operates effectively. The controversy over single-stock leveraged ETFs should serve as an opportunity to find institutional solutions that preserve the dynamism of capital markets while managing risks. Repeated stopgap regulations will not gain market trust or policy credibility.
* This article has been translated by AI.
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