Struggling with 'Negative Compounding': Calls for Swift Corrective Measures on Leveraged ETFs

[Anchor]

Leveraged ETFs tracking Samsung Electronics and SK Hynix have become a source of trouble, exacerbating volatility in the Korean stock market. While the government is working on improvements, it remains uncertain whether fundamental solutions will be reached.

Reporter Kim Hye-min has the story.

[Reporter]

During a policy briefing at the Presidential Office, President Lee Jae-myung directly addressed single-stock leveraged ETFs.

[President Lee Jae-myung: It seems many people are suffering because of the Samsung and Hynix ETFs...]

[Lee Chan-jin, Governor of the Financial Supervisory Service: As a market regulator, I bear responsibility, and I am ready to face the consequences.]

[President Lee Jae-myung: The Korea Exchange is also in an uproar because of these ETFs, right? Please ensure that corrective measures are prepared promptly.]

[Jeong Eun-bo, Chairman of the Korea Exchange: Yes, I will do so.]

Single-stock 2x leveraged ETFs are being blamed for extreme market volatility, evidenced by the fact that the circuit breaker, which had been triggered only 6 times in 27 years, has been activated 5 times since these ETFs were launched in May.

The issue is that to maintain a 2x volatility target, these funds must frequently buy or sell the underlying stocks, which in turn amplifies price fluctuations.

A negative compounding effect is also becoming prominent, where losses accumulate as prices fluctuate, making it increasingly difficult for the investment to return to its original value.

We compared the volatility rates since the day these single-stock leveraged ETFs were launched.

While the stock price of Samsung Electronics fell by 6% and SK Hynix rose by 1.46%, most of the leveraged ETF products saw declines well exceeding 20%.

[Kwon Min-kyung, Senior Research Fellow at the Korea Capital Market Institute: In Korea, exposure to Samsung Electronics and SK Hynix is very high, and they account for a significant portion of the index. Because interest in leveraged and inverse products is also relatively high, these factors can influence index volatility.]

Financial authorities have begun to prepare countermeasures.

Related alternatives are expected to be discussed at the Market Situation Inspection Meeting, which will be attended by officials from the Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service.

The Korea Financial Investment Association also held discussions with CEOs of major domestic brokerage firms on measures such as raising the minimum deposit requirement for single-stock leveraged ETF investments, which is currently 10 million won, and diversifying the rebalancing trading times used to maintain the 2x volatility rate.

However, with over 13 trillion won in individual investor capital already tied up in these leveraged products, blocking new inflows may have little impact. Furthermore, some reports suggest that the volatility-inducing effect of these ETFs is limited, leaving the effectiveness of the proposed measures uncertain.

Reported by Jung Sang-bo | Video by Kim Jun-hee | Graphics by Kang Yoon-jung | Produced by SBS Digital News
※ Please note: This article was translated by AI and may contain errors.