Korea's leveraged chip ETFs struggle to bring investors home

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Korean retail investors continue to pour money into leveraged products listed overseas, suggesting that the launch of domestic single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix has done little to curb broader demand for high-risk overseas products, industry officials said Thursday.

Leveraged products accounted for 21 of the 50 U.S.-listed securities most heavily bought on a net basis by Korean investors between June 2 and July 1, up from seven the previous month, according to SEIBro, a portal run by the Korea Securities Depository. Net purchases surged to $1.65 billion from $490 million in the May 2-June 1 period.

Korean investors were net sellers of Hong Kong-listed single- stock leveraged products from May 27 to July 1, but buying activity remained sizable. During the period, they purchased $151.5 million worth of the SK hynix product and $79.3 million worth of the Samsung Electronics product, the two largest purchase amounts among Hong Kong-listed securities bought by Korean investors.

Unlike in the domestic market, investors trading leveraged ETFs overseas are not required to meet deposit requirements or complete a mandatory trading education program, industry officials said. Many overseas products also offer foreign currency exposure, creating the potential for foreign exchange gains.

"Demand for overseas leveraged investments is still there," said an industry official, who spoke on condition of anonymity. "Domestic single-stock leveraged ETFs have simply created another avenue for retail investors to access high-risk products at home."

On June 22, Financial Supervisory Service (FSS) Gov. Lee Chan-jin told reporters that the products were introduced to stem overseas capital outflows but had "had little effect and only created side effects."

Financial authorities allowed domestic asset managers to list single-stock leveraged ETFs tied to Samsung Electronics and SK hynix on May 27, marking the first such launches in Korea. The rule change was aimed at curbing retail investors' shift into overseas leveraged products, which regulators feared was adding downward pressure on the won.

The initial rollout was confined to the two large-cap stocks, both familiar to retail investors and backed by highly liquid futures markets. The decision triggered 16 product launches tied to the pair. The policy has since drawn criticism for channeling excessive money into the two market heavyweights and amplifying volatility.

Overseas asset managers have been expanding their lineup of leveraged products tied to Korean stocks. Exchange-traded products offering three-times exposure to Samsung Electronics and SK hynix were listed in the U.K. market on June 12. In the U.S., single-stock leveraged ETFs based on Samsung Electro-Mechanics and Hyundai Motor are expected to launch as early as August.

"Direct investment in overseas-listed products may have continued to grow without domestic single-stock leveraged products, given U.K. listings and U.S. demand for products based on Korean blue-chip stocks," the FSS and the Financial Services Commission said in a joint statement on June 26.