South Korea's financial authorities are weighing tighter curbs on high-risk leveraged exchange-traded funds (ETFs) as part of efforts to stabilise the country's volatile stock market, which has left many investors with heavy losses and mounting debt.
Local media reports said the proposals under consideration could include giving regulators the power to reduce the leverage ratio of single-stock ETFs and raising the minimum investment requirement to discourage inexperienced retail investors from taking excessive risks.
Single-stock leveraged ETFs allow investors to amplify their exposure to a company's share price without owning the underlying stock, typically aiming to deliver twice the stock's daily return. Unlike conventional ETFs, they are tied to a single firm, such as Samsung Electronics or SK Hynix, and use derivatives to magnify both gains and losses.
These products quickly gained popularity during South Korea's stock market rally but have since come under scrutiny for amplifying market volatility. Many retail investors who bought leveraged ETFs linked to Samsung Electronics and SK Hynix near their peak suffered steep losses after the shares tumbled following record highs in June.
South Korea adopted a cap that could limit single-stock leveraged ETFs to 20% of an individual's total investment assets.
Finance Minister Koo Yun-cheol said the country will take steps to curb stock market volatility. He told a cabinet meeting televised live that authorities will swiftly enforce the measures unveiled on Thursday to curb use of single-stock leveraged ETFs.
The additional curbs were adopted after initial measures two weeks earlier failed to cool a retail boom in the risky investment products. Trading in leveraged ETFs tied to South Korea's two chip giants has shrunk sharply after authorities took steps to slow demand for products that fueled recent market volatility.
The drop in trading volume seems to have decreased daily volatility in KOSPI.
Daily trading volume in the TIGER SK Hynix single-stock leveraged ETF fell to 291 billion won on Monday from 482 billion won on Friday, which was itself down more than half from the previous day. In the TIGER Samsung Electronics single-stock leveraged ETF, daily trading volume fell to 234 billion won on Monday from 511 billion won on Friday and 1.4 trillion won on Thursday, Korea Exchange data shows.
Han Ji-young of Kiwoom Securities said trading volume in such ETFs fell sharply to 6.6% of South Korea's KOSPI market trading on July 31 and 5.4% on August 1, from 33.4% on July 30. Trading volume for the two most heavily invested single-stock leveraged ETFs hit their highest in late June at 3.9 trillion won and 3.6 trillion won, respectively.
There are a dozen single-stock leveraged ETF listings in South Korea, of which the TIGER SK Hynix and TIGER Samsung Electronics ETFs were the two most heavily invested. South Korea has seen signs of a slowdown in retail investment in these products.
