Asset manager's rare warning reaffirms risks of single-stock leveraged ETFs
Experts say products amplify investor losses, fuel market volatility
A mobile phone screen shows a single-stock leveraged exchange-traded fund (ETF) tracking the shares of SK hynix, May 27, the day the products debuted in the Korean stock market. Yonhap
Bae Jae-kyu, CEO of Korea Investment Management, has issued a rare warning, urging investors to “pull out of” single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix before mounting losses deepen.
The remarks, made in a now-deleted Facebook post on Monday evening, were highly unusual as they came from the head of an asset management company which had launched some of the very products he was cautioning against.
“I regret having to say this as the CEO of an asset manager that operates single-stock leveraged ETFs,” he wrote. “With volatility in the underlying shares this high, losses can compound day after day. Even if the stock itself eventually returns to where it started, the ETF may never fully recover. No one anticipated volatility on this scale.”
Leveraged ETFs are designed to deliver two or three times the daily return of an underlying asset, typically a broad market index such as the KOSPI or the S&P 500. Single-stock versions take that concept a step further, allowing investors to make amplified bets on the direction of an individual company rather than a diversified benchmark.
Bae Jae-kyu, CEO of Korea Investment Management / Korea Times file
The CEO pointed to SK hynix as a case in point. Between May 27, when the products were launched, and July 16, the chipmaker’s shares fell 17.9 percent, from 2.24 million won to 1.84 million won. Over the same period, however, a leveraged ETF tracking the stock tumbled 47.5 percent.
The discrepancy reflects what market professionals call volatility drag. Because gains and losses are applied to a constantly changing base value, each decline requires a disproportionately larger rebound to recover the loss. The gap widens as volatility persists, meaning a leveraged ETF can remain well below its starting point even after the underlying stock has fully recovered.
Since their launch, the products have come under fire for their impact on the broader market. Because Samsung Electronics and SK hynix account for more than half of the KOSPI’s market capitalization, their funds’ daily hedging and rebalancing trades can amplify buying and selling pressure in the underlying shares, adding to volatility across the wider market.
Choi Chul, a professor of consumer economics at Sookmyung Women’s University, said the products appeal primarily to investors chasing quick, outsized returns.
“Investors drawn to single-stock leveraged ETFs tend to have a highly speculative mindset,” he said. “They’re willing to take extraordinary risks in pursuit of extraordinary gains, and these products only reinforce that behavior.”
While leveraged ETFs may have a legitimate role for sophisticated investors capable of hedging and managing risk, they are ill-suited to retail investors hoping to make a fortune through a single high-risk bet, he added.
“Taken to its logical extreme, one could even ask whether the government is encouraging gambling.”
Yi June-suh, a professor of business administration at Dongguk University, echoed those concerns.
“Retail investors should not forget that these are extremely dangerous products that can leave them footing the bill while foreign and institutional investors walk away with the gains.”
During a Cabinet meeting Tuesday at Cheong Wa Dae, President Lee Jae Myung noted that while the financial authorities had hoped the products would help stabilize the Korean won by encouraging investors to trade domestically rather than through similar leveraged products listed overseas, ordinary investors “shouldn’t have to factor in such policy objectives when deciding whether to invest.”
“Many stock market participants believe these products amplified losses during the recent downturn. It is the government’s responsibility to come up with corrective measures," Lee said.
He questioned whether the latest measures announced by the country’s top four economic policymakers — including tripling ETF deposit requirements and requiring purchases to be fully funded with cash — would be enough. “We need to move quickly and take whatever additional action is necessary.”