ED Single-stock leverage: a major policy bungle

Kim Yong-beom, the presidential policy chief, speaks during a ministerial work briefing presided over by President Lee Jae Myung at the Cheong Wa Dae state guesthouse in Seoul, Thursday. Yonhap

The government's decision not to abolish single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix is understandable. With more than 10 trillion won ($6.7 billion) already invested in these products, an abrupt delisting could trigger severe market disruption and inflict significant losses on investors. Financial markets depend on predictability, and policymakers should not create unnecessary shocks through sudden regulatory reversals.

Yet acknowledging the risks of an immediate ban does not justify settling for cosmetic reforms. The measures recently announced by financial authorities — raising the minimum deposit requirement, increasing the minimum trading unit, expanding mandatory investor education and suspending new product listings — are unlikely to address the structural flaws that have made these products a growing source of instability in Korea's stock market.

The fundamental problem lies not in who is allowed to buy these products, but in how they operate.

Single-stock leveraged ETFs are designed to deliver twice the daily return of an underlying stock. To maintain that leverage ratio, fund managers and liquidity providers must rebalance their positions every trading day. When prices rise, they are forced to buy more shares.

This creates a dangerous feedback loop. Falling prices trigger forced selling, which pushes prices down further, leading to even more selling through index-linked products and derivatives. Instead of reflecting market fundamentals, prices increasingly become the product of automatic trading mechanics. In such circumstances, financial products no longer track the market — they begin to move it.

That risk is particularly acute in Korea.

Samsung Electronics and SK hynix together account for more than half of KOSPI's market capitalization. Their combined weight gives them an influence over the entire market that few companies anywhere in the world enjoy. By comparison, even Nvidia — the world's largest listed company by market value — accounts for less than one-tenth of the S&P 500. The structure of the Korean market is therefore fundamentally different from that of larger, more diversified markets.

This distinction should have shaped regulatory policy from the outset. Instead, authorities justified the introduction of single-stock leveraged ETFs largely by pointing to similar products overseas. That comparison ignored the most important variable: market concentration. Financial products that may be manageable in a broad, diversified market can become systemic risks when they are built upon companies that dominate an entire national stock exchange.

Regulators have argued that recent market volatility is driven primarily by global uncertainty surrounding the semiconductor industry rather than by leveraged ETFs themselves. There is certainly some truth to that claim. The world's memory-chip producers have all experienced sharp price swings as investors reassess the outlook for artificial intelligence and semiconductor demand.

But this explanation misses the point. Global uncertainty may explain why prices move; it does not explain why volatility becomes amplified within Korea's market. The issue is not whether leveraged ETFs create volatility from nothing. Rather, they act as powerful amplifiers, intensifying existing market movements through automatic and predictable trading behavior. In a market where two stocks dominate the benchmark index, that amplification affects every investor — not only those who choose to trade leveraged products.

This is why the government's latest response falls short. Raising entry barriers may reduce future inflows, but it does nothing to address the destabilizing mechanics embedded in the products themselves. Restricting access treats the symptoms while leaving the underlying disease untouched.

International investors have begun to notice. Several global investment banks have recently warned that Korea's market volatility is being exacerbated by the rapid growth of single-stock leveraged products. Whether every assessment is entirely correct is beside the point. What matters is perception. Capital markets depend as much on confidence as on fundamentals. If foreign investors increasingly view Korea as a market vulnerable to self-inflicted volatility, the country's long-term competitiveness will inevitably suffer.

Meaningful reform remains possible. Authorities should reconsider how daily rebalancing is conducted, explore mechanisms that spread rebalancing activity over longer periods to reduce concentrated market impact, impose reasonable limits on fund size where systemic risks emerge and continuously assess whether these products serve legitimate investment purposes or merely encourage speculative trading. If evidence continues to show that the cost to market stability outweighs their benefits, a gradual and carefully managed phase-out should remain on the table.

Financial regulation should not merely respond to crises after they occur; it should prevent market structures from creating avoidable risks in the first place. Korea's financial authorities were too quick to approve products whose consequences they underestimated. They should not repeat that mistake by assuming modest procedural adjustments will solve a fundamentally structural problem.

The objective of financial policy is not to preserve every financial product indefinitely. It is to safeguard the integrity, fairness and stability of the market as a whole. Half measures will not be enough.