Single-Stock Leveraged ETF Trading Plunges 89% After Deposit Hike
Trading in single-stock leveraged exchange-traded funds has plunged nearly 90% since the minimum deposit requirement was raised, but the decline should not necessarily be viewed as a complete success in protecting investors, a policy report said. It called for more effective safeguards that go beyon
Single-stock leveraged exchange-traded funds (ETFs) witnessed an 89% plunge in trading volume after the minimum deposit requirement was increased, according to a policy report. While this may appear as a positive outcome in investor protection, the report suggests further enhancements are needed beyond entry barriers. The report recommended that leverage levels should be dynamically adjusted according to product size and liquidity of the underlying stocks.
On July 31, the minimum deposit requirement for 16 single-stock leveraged and inverse ETFs in South Korea increased from 10 million won to 30 million won. As a result, the average daily trading value decreased from approximately 11.7 trillion won to 1.3 trillion won between July 31 and August 10. Despite this decline being linked to the higher deposit requirement, the report cautioned that this does not necessarily imply enhanced investor understanding or reduced losses.
The report emphasized the necessity for more effective mandatory investor education to clarify key risks, such as the daily return-tracking structure and negative compounding effects of these products.
Upon launch in May, single-stock leveraged ETFs saw heavy speculative demand, with a combined trading value of 10.4 trillion won on their first day alone—27% of total ETF trading. Concurrently, the KOSPI’s daily return volatility doubled, reaching 3.6% in the first half of the year. Volatility surged above 4% in March and June, surpassing levels seen after the COVID-19 outbreak.
The report emphasized the risk of rebalancing trades as product size increases, which could amplify price movements in underlying stocks like Samsung Electronics and SK hynix.
The research service cautioned against attributing the recent market volatility solely to leveraged products, citing factors such as global semiconductor industry uncertainty. Hong Kong’s variable-leverage structure, which adjusts target leverage ratios within a maximum limit based on market conditions, was cited as a potential solution.
South Korea is exploring similar measures, including the proposal of emergency powers for financial regulators to adjust risk levels during sharp market swings. A bill to amend the Capital Markets Act was introduced on August 11 to allow regulators to modify risk levels of leveraged products. The research service suggested that if such emergency powers are implemented, clear definitions of activation criteria, scope of measures, and methods of informing existing investors are required.
Additionally, new investors are now required to complete simulated trading before engaging in single-stock leveraged products, starting August 19, with continuous monitoring and clearer criteria for immediate response to increased risks being advocated.
Written by urgent.news from BusinessKorea's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
