[비즈한국] Financial Supervisory Service Governor Lee Chan-jin remarked at a press conference on the 22nd that he regretted not having "stopped it even if it meant lying down on the floor" regarding the 2x leverage ETFs for Samsung Electronics005930 and SK Hynix000660. He argued that the benefits were minimal while the side effects had grown too severe. Ironically, the very individuals who are currently trading these products the most are retail investors. 92% of investors in single-stock leverage ETFs are individual investors.
These products were introduced last month under the justification of keeping investment demand that was leaking to overseas markets within the country and reducing the incentives for capital flight. However, the result was the exact opposite. Within just one month, their combined market capitalization ballooned to approximately 12 trillion won—a threefold increase—and they came to account for more than one-third of all domestic ETF trading value.
In the meantime, the market has swung violently in both directions. Since their listing, there have been 7 trading days where the KOSPI fluctuated by more than 5%, a sidecar was triggered 11 times, and a circuit breaker was triggered 3 times. On the 23rd, the KOSPI index plunged 9.99%, marking its largest drop ever, while these leverage products fell by an average of around 25%. The very barrier intended to keep capital from leaving the country has become a variable that shakes the domestic stock market.
The first thing retail investors need to understand is the exact meaning of the word '2x'. These products track twice the 'daily' return of the underlying asset. It is not twice the 'period' return.
For example, suppose the stock price of Samsung Electronics rises 10% in one day and then falls 10% the next day. The underlying asset goes from 100 to 110 and then to 99. That is a 1% loss. However, the 2x leverage product rises from 100 to 120 and then drops to 96. That is a 4% loss. While the underlying asset dropped 1%, the leverage fell by 4%—not the 2% one might expect. This phenomenon where losses snowball as ups and downs repeat is called the 'negative compounding effect'.
The higher the volatility, the faster these losses accumulate, and currently, the volatility of the Korean stock market is at an all-time high. The KOSPI 200 Volatility Index, also known as the fear index, recently hit a record high.
There is ongoing debate over whether these products are the main culprits behind the increased market-wide volatility. Asset managers must buy more when the underlying asset rises and sell more when it falls to maintain the target multiplier, and concerns are raised that this mechanical trading amplifies gains in a bull market and deepens losses in a bear market. Nomura Securities analyzed that such products trigger approximately $9 billion worth of rebalancing trades for every 1% move in the market, and Bloomberg described this as "the tail wagging the dog."
Conversely, Korea Investment & Securities observed that the increase in the theoretical basis risk for futures after the listing was only 0.3 percentage points, suggesting that evidence of price distortion is limited. The asset management industry also counters that leverage investors tend to buy when prices drop and realize profits when they rise, which could even have a defensive effect. While opinions are divided on whether they are the primary culprits, it is clear that as speculative capital concentrates on the top one or two market-cap stocks, the volatility of the Samsung Electronics common shares you hold will increase, even if you avoid these products yourself.
So, are the retail investors currently in these products making money? According to data released by one asset manager, as of late June, about 60% of holders were in profit, outnumbering those with losses. However, this figure should not be a reason for complacency. It excludes those who have already sold and exited, and the current profits are the result of a general upward trend for the two stocks.
The negative compounding effect does not show itself clearly in a market trending in one direction, but it starts to cause real losses during volatile periods characterized by repeated fluctuations. The plunge on the 23rd is close to a precursor of this. The fact that one is currently in profit does not mean the product is safe.
In the midst of intense fluctuations, there is someone who is definitely making a profit. The average daily turnover rate for these products has easily exceeded 100%. This means they were bought and sold several times a day, and the more frequent the turnover, the more commissions pile up for the securities firms. This is why Governor Lee Chan-jin described it as "the appearance of someone taking a 'cut' from a gambling table."
Investors stay glued to the ticker all day, repeating day trades, but they are unlikely to retain significant real gains and are more likely to bear the full brunt of the volatility. Although authorities have belatedly begun to review restrictions on credit and margin trading and are looking to strengthen entry requirements for investors, critics point out that this is insufficient to cool down the overheating market.
Ultimately, retail investors must keep in mind that daily leverage is not a product for holding long-term. Especially in a market where ups and downs repeat, the cumulative return can deviate significantly from 2x the underlying asset over time due to the negative compounding effect.
Interestingly, even the asset management industry that created these products says the same thing. An executive at a large asset management firm emphasized, "We absolutely do not recommend long-term investment in any leverage products," adding that "it is a product to be approached with a 'short bat' during periods of rapid decline or ascent." Both the makers and the supervisors are saying, "Do not hold them for long."
A product that promises 2x returns also promises 2x losses. Nevertheless, the market's thirst has spread to even higher multipliers, with products appearing on overseas exchanges that bet 50x on the two stocks. The greater the temptation, the deeper the trap. Leverage is not a tool to boost conviction, but a tool that turns time and volatility into enemies rather than allies.
Even if you are currently making a profit, the surest safeguard for a retail investor is simply to fully understand how the structure works.