Concentration and Day Trading: Why the FSS Chief Regrets Approving Single-Stock Leverage ETFs

The reason Financial Supervisory Service (FSS) Governor Lee Chan-jin expressed regret over the introduction of single-stock leverage exchange-traded funds (ETFs) for Samsung Electronics and SK Hynix is that these leveraged products are intensifying market concentration in the Korean stock market and amplifying volatility through high-frequency day trading by retail investors.

While the domestic stock market has been breaking all-time highs, there are growing concerns over market concentration centered around semiconductor stocks, and critics point out that single-stock leverage ETFs are exacerbating this trend.

According to the Korea Exchange on Tuesday, June 23, among the 16 "Samjeonnix" (Samsung Electronics and SK Hynix) single-stock leverage and inverse products listed on May 27, the most heavily traded ones—KODEX and TIGER SK Hynix single-stock leverage ETFs and Samsung Electronics single-stock leverage ETFs—each plummeted by more than 24%.

These products track twice (±2x) the daily performance of the spot or futures prices of SK Hynix and Samsung Electronics. As the stock prices of SK Hynix and Samsung Electronics plunged by around 11% each, the leveraged products suffered a crash of more than double that rate.

While they offer double the returns when the stock prices of SK Hynix and Samsung Electronics rise, they are blamed for amplifying market volatility, particularly during market corrections, as panic selling occurs.

It is estimated that supply and demand dynamics of these single-stock leverage and inverse products for the "two giants"—Samsung Electronics and SK Hynix—also influenced the KOSPI's sharp drop of 910.71 points (9.99%) on Tuesday.

Park Seung-jin, a researcher at Hana Securities, said, "While it would not have been surprising for the domestic stock market to undergo a correction at any time, leveraged products indirectly played a role in amplifying it. Since investors engage in intraday day trading, price swings inevitably widen, and the resulting concentration in one direction can affect supply and demand."

A key factor driving this volatility is the massive trading volume.

This is also a factor causing another form of concentration within the ETF market itself.

Since the listing of these products until Monday, June 22, their average daily trading value has exceeded 10 trillion won.

On June 22, the daily trading values for KODEX and TIGER SK Hynix single-stock leverage ETFs reached 5.8 trillion won and 3.9 trillion won, respectively.

The trading values for the Samsung Electronics single-stock leverage ETFs reached 2.4 trillion won and 1.6 trillion won, respectively.

This means the combined daily trading value of these four products alone reached 13.7 trillion won on June 22.

Consequently, from May 27 to June 22, these four products swept the top spots as the most net-purchased ETFs by retail investors, ranking first, second, third, and fifth, respectively.

Even in the overall retail net purchase rankings, which include individual stocks, KODEX SK Hynix single-stock leverage ranked third, following Samsung Electronics and SK Hynix, with these leveraged products occupying four of the top 10 spots.

Another cause for concern is that trading in these leveraged products is occurring at an ultra-fast pace of "day trading," far exceeding market expectations.

According to the FSS, the average daily trading turnover rate for single-stock leverage products from May 27 to June 12 reached 122.5%.

This indicates that the entire outstanding shares changed hands more than once a day, significantly exceeding the turnover rate of Samsung Electronics and SK Hynix spot shares (less than 1%) and domestic equity leveraged/inverse ETFs (30.2%).

An industry insider said, "While the holding period for typical leveraged ETFs is short, usually around three to four days, the holding period for single-stock leverage ETFs seems to be much shorter than that."

The turnover rate for these products even neared 200% at its peak.

With trillions of won traded through such extreme day trading, securities firms stand to rake in massive commission fees.

FSS Governor Lee Chan-jin pointed out, "The extreme turnover rate is only serving to enrich securities firms."

In fact, for just the KODEX and TIGER SK Hynix single-stock leverage ETFs, the cumulative trading values since their listing up to June 22—less than a month—reached 52 trillion won and 29 trillion won, respectively.

The FSS estimated that securities firms could earn up to 10 trillion won in trading commissions through this leveraged trading.

However, analysts suggest that the FSS chief's "regret" stems from the fact that the single-stock leverage products failed to deliver their intended effects.

These products were introduced late last year amid a prolonged period of high exchange rates, in an effort to redirect the investment demand of "Seohak Ants" (Korean retail investors investing in overseas markets) back to the domestic stock market.

However, the value of U.S. stocks held by Korean retail investors still hovers around 300 trillion won, and the won-dollar exchange rate, which was expected to stabilize, has instead risen due to overlapping external factors, trading in the mid-1,500 won range.

A researcher in the securities industry said, "It seems insufficient to consider the exchange rate solely in terms of overseas-investing retail investors. Looking at May alone, there was an influx of these investors, yet the exchange rate rose. Retail investors cannot be the main driver of the exchange rate; we need a comprehensive approach that considers monetary policy, wars, and potential growth rates."

(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.