Korea's Tightened Leveraged ETF Regulation Shows Effect: Trading Volume Falls Below 1 Trillion KRW for Two Consecutive Days, Heat Clearly Cooling Off

Odaily News: One week after the implementation of regulatory measures on single-stock leveraged and inverse ETFs in South Korea, trading activity in related products has noticeably cooled, with trading volume falling below 1 trillion KRW for two consecutive trading days.

According to data from the Korea Exchange (KRX), on August 7, the combined trading volume of 16 single-stock leveraged and inverse ETFs in the Korean market stood at 941.2 billion KRW, marking the second consecutive trading day below 1 trillion KRW after the previous day's 919.8 billion KRW.

Market observers believe the decline in trading volume is mainly attributed to the new regulatory measures implemented on July 31. The new rules raise the capital threshold for ordinary retail investors to participate in single-stock leveraged ETFs, increasing the base margin requirement from 10 million KRW to 30 million KRW in cash.

Data shows that on the day before the regulation took effect (July 30), the trading volume of the 16 related ETFs reached as high as 12.45 trillion KRW. On the first day of regulation (July 31), it plummeted to 3.15 trillion KRW, and has continued to decline since, dropping to 1.39 trillion KRW and 1.26 trillion KRW on August 3 and 4 respectively, before falling below 1 trillion KRW in recent days.

Meanwhile, the share of single-stock leveraged and inverse ETFs in the overall Korean ETF market turnover has also dropped significantly, falling to 5.6% on August 7, compared with 30% to 40% before the regulation.

However, Korean securities institutions point out that investment demand has not completely disappeared. Instead, there is evidence of "regulatory arbitrage" or a "balloon effect," with funds shifting toward semiconductor leveraged ETFs and overseas-listed leveraged products.

Jung Hyun-jong, a researcher at Korea Investment & Securities, stated that while single-stock leveraged ETF trading volumes have declined following the regulation, semiconductor leveraged ETF trading volume has actually increased, indicating that some capital is rotating into alternative products. Overseas market products may also become targets for capital flows. Jung noted that since overseas-listed ETFs are not subject to domestic Korean regulatory restrictions, investors may turn to overseas single-stock leveraged ETFs. Among them, the Hong Kong-listed CSOP SK Hynix Daily (2x) Leveraged Product is currently one of the largest single-stock leveraged ETF products globally by market capitalization. Domestic Korean regulatory measures alone are unlikely to fully curb investor demand for semiconductor cycles and high-leverage strategies, and the long-term effectiveness of the regulation will require continued observation. (Daum)