“Five rounds of margin calls, account still cut in half” – leveraged ETFs become a “meat grinder” for Korean retail investors
- Core Argument: The severe loss crisis in the Korean single-stock leveraged ETF market, triggered by retail investors blindly adding margin, stems from policy products hastily introduced by financial authorities to curb capital outflows. The structural risk (negative compounding effect) of these products was dramatically amplified during the stock market's violent fluctuations.
- Key Elements:
- The sharp drop in the Korean stock market on July 28 triggered a circuit breaker. The monthly trading volume of two SK Hynix-related leveraged ETFs reached 139 trillion won, exceeding the total turnover of the entire KOSDAQ market.
- Individual investors have fallen into a “margin call trap,” with typical cases showing floating losses exceeding 50%. For instance, a former investment competition champion saw a 61.38% loss on his 120 million won principal, reducing it to just 46 million won.
- The “negative compounding” effect of leveraged ETFs is the core risk: daily losses accumulate continuously in a volatile market. Even if the underlying stock price returns to its original level, the ETF price is highly likely not to recover.
- Retail investors tend towards high-momentum, trend-following investment models, leading to significantly amplified drawdowns when the market reverses. For example, the return of the “Donghak Ant” ETF was far lower than that of the KOSPI ETF.
- Financial authorities have been accused of failing to conduct adequate due diligence during the product approval process. The head of South Korea's Financial Supervisory Service expressed regret, stating he “wishes he had stopped it,” and critics are calling for a state compensation program to hold regulators accountable for negligence.
- Existing regulatory measures (raising the margin requirement to 30 million won) have failed to effectively cool the market. Regulators have stated that if market enthusiasm does not subside, they will consider further raising investment thresholds or personal investment limits.
Original Author: Zhang Yaqi
Original Source: Wall Street Sights
South Korea's single-stock leveraged ETF market is experiencing a retail investor crisis. Amidst violent stock market fluctuations, a large number of individual investors have fallen deeper into a trap by repeatedly adding positions in an attempt to average down their costs, with paper losses commonly exceeding 50%. The root of this crisis is a policy product hastily launched by financial authorities two months ago to curb capital outflows.
On July 28, both of South Korea's major stock exchanges triggered circuit breakers, sharply deteriorating market sentiment. The Korea Composite Stock Price Index (KOSPI) fell below the 6,000-point mark that day for the first time in over three months. In this context, the cumulative trading volume of two products – "KODEX SK Hynix Single Stock Leverage" and "SOL SK Hynix Futures Single Stock Inverse 2X" – has already exceeded 139 trillion won this month, surpassing the total trading volume of the entire KOSDAQ market (113 trillion won) by more than 26 trillion won. The Financial Services Commission announced on the same day that if market demand continues to be overheated, it will consider further raising investment thresholds or setting individual investment caps.
The direct victims of this turmoil are tens of thousands of ordinary retail investors. The Financial Services Commission had already raised the basic margin requirement for related products from 10 million won to 30 million won on July 16, but trading fervor has not subsided – on the day of the announcement, single-stock leveraged products accounted for a high of 36.6% of total ETF trading volume, subsequently remaining in the 37% to 43% range. Criticism has also intensified, with some arguing that the authorities were seriously negligent in the product approval process, and voices are calling for the initiation of state compensation procedures.
Retail Investors Deep in the Trap of Averaging Down, Losses Staggering
Harrowing examples of significant losses among individual investors are emerging online.
A 45-year-old office worker, Kim, started with an investment of 7 million won in single-stock leveraged ETFs for SK Hynix and Samsung Electronics. Every time the stock price dropped, he bought more, rationalizing it as 'averaging down helps for a rebound to break even,' adding positions five times in total. His total investment ballooned to 34 million won, but his current paper loss rate has exceeded 50%. "I kept buying more to try and recover my losses, only to sink deeper. Now I can neither sell nor buy more," he said.
The experience of Choi, a 25-year-old university student, is similarly typical. He entered the market with 8 million won saved from part-time jobs. After semiconductor stocks fell, he borrowed living expense loans to buy more single-stock leveraged ETFs, leaving his account with only about half of his original principal. "The speed at which losses grow is much faster and more brutal than when profits accumulate," he said.
On the workplace anonymous community "Blind," a bank employee posted that his portfolio, which started with 2 billion won and once appreciated to 7 billion won, shrunk to about 2.2 billion won within a month after he concentrated holdings in Samsung Electronics and SK Hynix common stocks and single-stock leveraged ETFs. Yeo Kyung-ok, a Chinese cuisine chef who once won an investment contest with a 750% return, also disclosed his SK Hynix leveraged ETF account – the initial principal of about 120 million won is now valued at just 46 million won, a paper loss of approximately 74 million won, or a loss rate of 61.38%.
Inherent Structural Risks of Leveraged Products Underestimated
The product mechanism of leveraged ETFs is the core reason for the continuous widening of losses.
These products aim to track twice the daily return of the underlying asset. If the underlying asset rises unilaterally, gains can be amplified. However, in volatile, alternating up-and-down markets, a 'negative compounding' effect causes losses to accumulate continuously – even if the underlying asset eventually returns to its original price, the leveraged ETF often fails to recover its value.
Bae Jae-kyu, President of Korea Investment Management, recently issued a public warning: "If the underlying stock fluctuates as violently as it is now, the leveraged ETF will continue to accumulate losses daily. Even if the stock price returns to its original level later, the ETF price will most likely not follow." He frankly advised investors, "Even now, do not invest in individual stock leveraged ETFs."
From an industry perspective, the retail investor tendency to chase a single theme is also a structural weakness that amplifies losses. The "RISE Donghak Ant" ETF, which tracks domestic retail buying trends, has risen only about 13% this year, while the RISE KOSPI ETF gained approximately 58% over the same period. Conversely, the "KODEX U.S. Seohak Ant" ETF, tracking overseas retail holdings, has fallen 2.7% year-to-date, while the KODEX U.S. S&P 500 ETF has risen 11.2%. Park Seung-jin, an ETF researcher at Hana Securities, pointed out that individual investors have a higher risk appetite and tend to prioritize momentum and trends as stock selection criteria, which leads to significant drawdowns when the market trend reverses.
Controversy Over Hasty Product Launch, Calls for 'State Compensation' Emerge
The policy backdrop of this crisis is also highly contentious.
The aforementioned single-stock leveraged ETFs were launched on May 27, with the official goal of alleviating high exchange rate pressure, curbing capital outflows, and revitalizing the domestic stock market. However, after the products hit the market, massive amounts of capital quickly concentrated in specific stock leveraged products. The mechanical daily rebalancing operations near market close amplified price fluctuations in the underlying stocks, triggering the "short gamma" effect feared by market participants. According to reports, the net asset value of related products reached 16 trillion won by the end of June, with a single-day trading volume once reaching 14 trillion won.
In response to the chaos, Lee Chan-jin, head of the Financial Supervisory Service, previously stated, "I regret it now. We should have tried desperately to stop it (the approval of the securities registration statement back then)." This remark is seen externally as an implicit admission of regulatory failure in the approval process.
Critics argue that the authorities hastily pushed forward without adequately assessing market impact and risk control mechanisms, leading numerous retail investors to suffer severe asset losses. Some have explicitly called for initiating a state compensation accountability mechanism for regulatory negligence and urged the National Assembly's Political Affairs Committee to investigate responsibilities in the product approval process through inquiries and investigations. People Power Party lawmaker Kim Eun-hye stated that there is currently a broad effort to collect opinions from victimized investors, hoping for a swift improvement in the situation.
Regulatory Intervention Steps In, Further Measures Pending
Financial authorities have clearly indicated they will further tighten control, but the specific degree of force remains to be seen.
On July 27, the ruling Democratic Party's K-Capital Market Special Committee held a closed-door meeting with securities companies and asset management firms. They decided to first observe the actual effect of existing measures, such as raising the basic margin requirement to 30 million won, before deciding whether to implement additional controls. The committee stated that it is not currently considering forced delisting or reducing the leverage multiple but retains the option to take further action based on market conditions.
On July 28, Financial Services Commission Chairman Lee Eok-won met with representatives of securities companies and management firms and stated clearly, "If market demand does not sufficiently cool down, we will consider supplementary measures such as further tightening investment conditions or setting individual investment limits." He also pledged to continuously develop plans to help reduce market volatility and strengthen investor protection.
