Korean day traders flee leveraged chip ETFs as regulatory curbs bite

South Korean retail investors are pulling back significantly from leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix, according to Bloomberg. Trading activity for ETFs that aim to deliver twice the daily returns of these chipmakers has plummeted to only 4% of its June peak. Combined outflows from these products have reached $1 billion so far in August, signaling the first monthly outflow.

A key reason for the pullback is a mandatory five-day simulated trading course introduced on August 19. Investors must download a Windows-only program and trade with virtual funds for at least one hour each day before accessing the products. This requirement follows earlier measures like higher minimum deposits to curb speculative activity contributing to sharp market swings in South Korea.

The leveraged ETFs were launched in May to attract more retail investment into domestic equities. Demand initially surged, with turnover in these products and their underlying Samsung Electronics and SK Hynix shares accounting for over 80% of total market trading at one point. However, assets held by the leveraged ETFs have since dwindled to about $5 billion as of August 27, down from a late-June peak of $11.4 billion.

Factors such as global technology selloffs and concerns about AI spending and monetization have further dampened demand for these ETFs. Bloomberg Intelligence analyst Rebecca Sin predicts that outflows could continue in the near term due to the tightening regulatory restrictions. The retreat in demand has coincided with lower market volatility, with the Kospi volatility gauge dropping to a four-month low near 50 from 97 in late June.

Despite this, South Korea’s benchmark index remains up 61% this year, though it is still about 25% below the record reached two months ago.