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Mixed messages on leveraged ETFs fuel investor confusion
Financial Supervisory Service (FSS) Gov. Lee Chan-jin speaks during a press briefing at the FSS headquarters in Seoul, Monday. Yonhap
By Jun Ji-hye
Newly introduced single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix, originally promoted by the government as part of efforts to invigorate the domestic capital market, are drawing renewed scrutiny after the head of Korea's financial watchdog publicly criticized the products just a month after their launch, industry officials said Thursday.
The apparent disconnect between the government's market-friendly agenda and the Financial Supervisory Service's (FSS) assessment has fueled concerns about policy consistency and investor confidence.
At a press briefing Monday, FSS Gov. Lee Chan-jin expressed regret over not having pursued every possible measure to stop the introduction of the products.
"The products were introduced under a tight timeline," he said. "The expected benefits have fallen short, while the associated risks and unintended consequences have proven more significant than anticipated."
On May 27, brokerages launched 16 single-stock leveraged and inverse ETFs tracking Samsung Electronics and SK hynix, attracting a rapid influx of retail investor funds. Of these, 14 are leveraged products designed to deliver twice the daily return of the underlying stocks.
The FSS chief's comments came amid growing concerns that leveraged ETFs tied to major semiconductor stocks are contributing to heightened market volatility.
Because the products seek to provide returns equal to double the daily performance of the chipmakers, they can significantly boost gains in a rising market while exposing investors to larger losses during downturns.
The FSS governor's suggestion that the ETFs may have been a mistake has deepened controversy and confusion, given that President Lee Jae Myung has repeatedly emphasized the need to invigorate the domestic stock market. Financial authorities have also backed the launch of the products in an effort to redirect retail investment from overseas markets, particularly U.S. stocks.
"The products were approved through formal reviews by the Financial Services Commission (FSC) and the Korea Exchange," an asset management industry official said. "In this context, public criticism from the financial watchdog could weaken regulatory credibility and add to uncertainty for investors already exposed to the products."
SK hynix headquarters in Icheon, Gyeonggi Province, May 26 / Yonhap
What has further fueled concern is the sheer amount of retail money already committed to the products. Korea Exchange data showed that individual investors purchased a net 421.7 billion won ($273.45 million) of Samsung Electronics single-stock leveraged ETFs and 594.9 billion won of SK hynix-linked leveraged ETFs between their May 27 debut and Wednesday. Combined net purchases exceeded 1 trillion won during the period.
However, the recent increase in volatility across semiconductor stocks has exposed investors to greater downside risk. Several of the leveraged ETFs have retreated by as much as 24 percent from their recent highs, highlighting how quickly losses can accumulate when market sentiment turns against the underlying shares.
The FSS governor also stirred further debate by claiming that the exceptionally high turnover of the single-stock leveraged ETFs could generate up to 10 trillion won in brokerage commissions, arguing that securities firms were the primary beneficiaries of the trading boom.
The remarks were viewed as a warning about speculative trading and potential investor losses in high-risk products. However, Hwang Seong-yeop, chairman of the Korea Financial Investment Association, pushed back, calling the estimate a misunderstanding and saying revenue generated since the ETFs' launch was closer to 50 billion won.
An FSS official later clarified that the 10 trillion won figure was an annualized projection based on current turnover rates.
"The governor's remarks were intended to highlight the risks of excessive investment concentration in leveraged products and the need for stronger investor protection measures," the official said.
Separately, the Board of Audit and Inspection (BAI) has launched a 20-day on-site review of the FSC and the FSS to assess whether they have adequately carried out their investor protection responsibilities.
It is widely believed that the review could also examine the recently introduced leveraged ETFs, although the BAI said the audit is not targeting any specific individual or policy.
"The inspection will evaluate the appropriateness of the authorities' supervisory functions, including examinations, sanctions and dispute-resolution procedures, and identify areas for improvement," a BAI official said.