[비즈한국] There are few things as attractive as seeing dividends hit your bank account every month. Another is watching your assets grow twice as fast as the index. On a day when the KOSPI 200 rises 1%, your ETF rises 2%. It is because of this simple appeal that many retail investors prefer leverage ETFs. According to the Korea Financial Investment Association, the number of people who completed the mandatory pre-training for domestic leverage ETPs reached 300,000 as of February this year, already surpassing the total of 205,000 for all of last year in just two months. Furthermore, starting at the end of this month, the first-ever single-stock leverage ETFs based on Samsung Electronics005930 and SK Hynix000660 will be listed in Korea. These are based on two stocks that have met strict requirements such as a market capitalization of over 10% and a trading volume of over 5%. Sixteen products are being prepared by eight asset management companies. An era is dawning where you can buy a 'Samsung Electronics 2x ETF' directly on the Korea Exchange.
However, why did the government permit these products while adding an extra hour of intensive pre-training for single-stock products, on top of the existing 10 million won basic deposit requirement for leverage products? And why is the supervisory authority in the U.S. growing increasingly wary of high-leverage ETFs that exceed 2x?
The answer lies in the operating principle of leverage ETFs. This principle is also the point most frequently misunderstood by general investors. The most common misconception is this: "If Samsung Electronics rises 20% in a year, a 2x leverage ETF will rise 40%." To cut to the chase, that is not true. Leverage ETFs are designed to track twice the 'daily return,' not twice the 'annual cumulative return.' The accumulation of these 'daily' movements creates results that are completely counterintuitive.
Let's look at a simple example. Suppose a stock falls 20% on the first day and rises 20% on the second day. Since the percentage of fluctuation is the same, it seems like it returned to its original position, but that is not the case. 1 million won becomes 800,000 won, and then rising 20% from there results in 960,000 won. It is a 4% loss over two days.
Now, what happens if you put 1 million won into a 2x leverage ETF of the same stock? It falls 40% on the first day to 600,000 won, and then rises 40% on the second day to 840,000 won. Starting from the same price and experiencing the same range of fluctuations, the underlying asset has a 4% loss, while the leverage ETF has a 16% loss. The difference in loss is fourfold. This is the biggest trap of leverage ETFs: the 'negative compounding effect' or 'volatility drag.' This effect is not obvious when the market moves strongly in one direction. In a market rising in a straight line, leverage can even yield more than double the returns.
The problem is a volatile, sideways market. In periods where prices repeatedly rise and fall, leverage ETFs steadily erode value even if the underlying asset remains flat. Therefore, leverage ETFs are essentially 'short-term directional betting tools' and not 'long-term holding assets.' Asset managers also state in their prospectuses that these are products for short-term trading, and this is why mandatory pre-training is required.
This listing of single-stock leverage ETFs is a form where this risk is further condensed because there is no diversification effect at all. The Financial Services Commission permitted the inclusion of single stocks at 100% by excluding the 'diversification requirement of 10 or more stocks' applied to existing ETFs, but it is in the same vein that they required 'single stock' to be clearly marked in the product name. It is a signal for investors to clearly recognize that there is no diversification effect.
Market interest is already high. Yoon Jae-hong, a researcher at Mirae Asset Securities, analyzed, "Applying the case of U.S. single-stock leverage ETPs, funds expected to flow into Samsung Electronics and SK Hynix leverage ETFs are estimated at 1.7 trillion won in a conservative estimate and 5.3 trillion won in an aggressive estimate." He added, "Considering that early capital for listings is concentrated in the first 5 trading days, one should be mindful of the possibility of a surge in short-term volatility immediately after listing." In fact, the total net assets of Samsung Electronics and SK Hynix leverage ETPs listed in Hong Kong last May reached $4.4 billion, and Korean investors alone hold approximately 280 billion won of that.
The tax structure is two-sided. As single-stock leverage ETFs utilize a derivative structure, they are classified as 'other ETFs' for tax purposes, meaning trading profits are subject to a 15.4% dividend income tax and can be added to the comprehensive financial income tax. It is not structured like overseas-listed ETFs where annual gains and losses are aggregated or a 2.5 million won basic deduction is applied. However, thanks to a structure where taxes are levied on the lesser of the increased tax base or trading profit, the effective tax burden is relatively lower compared to the 22% transfer income tax on overseas-listed leverage ETPs. This means there is a clear incentive for domestic investors holding Hong Kong-listed Samsung/SK Hynix leverage ETPs to move their capital back to Korea.
However, this only means that 'the tax is more favorable,' not that the risk of the product itself has decreased. Lower taxes do not make the volatility drag disappear. Strong demand means that supply-demand concentration immediately after listing can increase the volatility of both the underlying asset and the ETF price. Furthermore, as volatility increases, the negative compounding effect of leverage ETFs becomes more pronounced.
Researcher Yoon also observed, "When a new ETF is listed, the exit of existing common stock investors and the transfer of funds from existing semiconductor ETFs occur simultaneously; therefore, while the net impact on common stocks is favorable, the absolute impact is limited." This means that the simple expectation that the Samsung Electronics stock price will rise significantly due to the leverage ETF is not well supported by data. Instead, it is more likely that leverage holders will lose money in periods of high volatility.
So, should you never buy leverage ETFs? Not necessarily. They are neither good nor bad products; they are simply 'short-term directional betting tools.' They are meaningful when you have strong conviction in the market's direction, the holding period is short, and they are used for a small portion of your total assets. Conversely, transferring your core assets with the expectation that "it will grow twice as much if I hold it long-term" is using the tool in the exact opposite way intended. The longer the high-volatility period, the more the assets will shrink.
Behind that attractive number, which grows twice as fast when the index rises 1%, lies the negative compounding that accumulates daily. The fact that the government made intensive pre-training mandatory for single stocks in addition to the 10 million won basic deposit for existing leverage products is a signal sent to investors. It means this is not a product that one should 'buy easily.' When you see the name 'Samsung Electronics Leverage' in the new ETF window, the first question you should ask is not "How much will this go up?" but "How many days will I hold this?" If the answer is not clear, not buying it is also a good choice.