Korean investors flock to leveraged US ETFs, take another hit

A trader works on the floor of the New York Stock Exchange, July 20. UPI-Yonhap

A retail investor surnamed Min knew the risks before pressing the buy button. But the urge to make up for the gains he had missed overwhelmed his better judgment.

In early July, the 29-year-old purchased 5 million won ($3,496.26) worth of Direxion Daily Semiconductor Bull 3X Shares, an exchange-traded fund (ETF) known by its ticker, SOXL. The fund seeks to deliver three times the daily return of the Philadelphia Semiconductor Index.

When he checked his account the next morning, his position was already down more than 10 percent. He saw the decline as another buying opportunity and added to his holdings. His losses continued to deepen, eventually reaching 30 percent.

"I naively thought that the bad news surrounding chip stocks would end just after I bought in, followed by a sharp rebound," he said. "I let the fear of missing out take over."

Min is one of many retail investors who have piled into triple-leveraged U.S. ETFs as chip stocks have languished at home and Korean authorities have tightened regulations on trading single-stock leveraged ETFs tied to Samsung Electronics and SK hynix.

Korean retail investors were net buyers of $4.67 billion worth of U.S. stocks in July, according to SEIBro, a portal operated by the Korea Securities Depository. It was the largest monthly net purchase since the $5 billion recorded in January.

Net selling reversed into net buying in June, when investors purchased a net $633 million as the benchmark index slumped. SOXL was the most heavily purchased security during the period, attracting $3.77 billion in net buying.

"In many ways, this has been an era of leverage globally," Choi Chang-kyu, head of ETF research at Mirae Asset Global Investments, said on a local radio program Friday. "The appetite for such bets became particularly pronounced in memory chips, where investors believed strong industry fundamentals justified taking an outsized gamble."

Many retail investors who piled into risky bets have already suffered steep losses at home. Citi estimated in a recent note to institutional investors that Korean retail investors had lost about $38.7 billion on single-stock leveraged ETFs tied to Samsung Electronics and SK hynix over the previous month.

Investors then suffered another round of heavy losses in the U.S. market.

Despite net inflows of $5.3 billion in June and July, the value of Korean retail investors' U.S. stock holdings fell by $33.7 billion. The decline was equivalent to about 16.5 percent of their holdings at the end of May, far exceeding the broader market's losses. The S&P 500 fell 1.9 percent, while the Nasdaq dropped 6.9 percent over the same period.

The losses were driven partly by sharp declines in Tesla and Nvidia, the two most widely held stocks among Korean retail investors. But the damage was even more pronounced in leveraged products.

Investors poured nearly $4 billion into SOXL in June and July, yet the value of their holdings increased by only $460 million, from $5.35 billion at the end of May to $5.81 billion at the end of July.

Meanwhile, leveraged investing is becoming more difficult at home, suggesting that risk-seeking investors may increasingly turn to overseas markets.

Korean authorities have tightened restrictions on single-stock leveraged ETFs and are seeking emergency powers to intervene during periods of extreme volatility. The proposed authority would allow regulators to temporarily lower leverage ratios, restrict trading or take other measures to stabilize the market.