Increasing number of retail investors pursue triple-leveraged daily returns abroad

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An increasing number of Korean retail investors are turning to high-risk exchange-traded funds (ETFs), betting on triple daily swings or investing in futures products related to Bitcoin. These financial products are prohibited from domestic sales due to their high volatility, but they can still be traded directly in overseas markets.

According to the Korea Securities Depository, Friday, five of the top 10 products domestic investors purchased from the U.S. stock market this year were leveraged ETFs, accounting for about $2 billion.

The most-purchased product was the Direxion Dly Semiconductor Bull 3X ETF, totaling $552 million. This ETF delivers returns at three times the daily rate of the PHLX Semiconductor Sector Index, amplifying gains when the index rises.

An ETF leveraged to Bitcoin, the 2x Bitcoin Strategy ETF, was also a popular choice, ranking seventh with assets totaling $361.12 million. This product tracks double the return of the Bitcoin futures index.

The proportion of individual investors' holdings in these high-risk assets has expanded rapidly, reaching about 12 percent by the end of June, up significantly from less than 1 percent in 2020.

These ultra-high-risk ETFs can yield returns double or triple the invested amount when the market moves in the anticipated direction. However, losses can be equally substantial, making cautious investment essential. Due to the high risks, their release has been prohibited in the domestic market since the second half of 2020 to protect investors.

In the domestic market, ETFs on foreign stocks are restricted to a maximum leverage ratio of 2x. Regulations also mandate that these products include a mix of bonds and at least 10 underlying assets, with a 30 percent cap on individual asset weightings.

The recent stagnation in the domestic market has led some risk-seeking individual Korean investors to shift their focus to these high-risk assets, according to market watchers, Friday.

"As consumer protection regulations for domestic leveraged funds were tightened in the latter half of 2020, investors gravitated toward overseas ETFs without such restrictions," Kim Han-soo, a research fellow at the Korea Capital Market Institute, wrote in his recent report.

"From a consumer protection standpoint, it would be appropriate to apply consistent regulations to similar products, regardless of their country of origin."