A crisis is unfolding for retail investors in South Korea's single-stock leveraged ETF market. Amid severe stock market volatility, a large number of individual investors, attempting to lower their average cost through repeated top-ups, are finding themselves in increasingly deep trouble, with paper losses exceeding 50% in many cases. The root of the crisis is a policy product hastily introduced two months ago by financial authorities aiming to curb capital outflows.
On July 28, circuit breakers were triggered on both of South Korea's major stock exchanges, sharply worsening market sentiment. The Korea Composite Stock Price Index (KOSPI) fell below 6000 points that day, marking its lowest level in over three months. Against this backdrop, two products—the KODEX SK Hynix Single Stock Leveraged and SOL SK Hynix Futures Single Stock Inverse 2X—recorded a combined monthly trading volume surpassing 139 trillion won, exceeding the total trading volume of the KOSDAQ market (113 trillion won) by over 26 trillion won. The Financial Services Commission announced that day that if market demand does not cool, it would consider further raising investment thresholds or setting individual investment limits.
The direct victims of this turmoil are countless ordinary retail investors. The Financial Services Commission raised the basic margin requirement for related products from 10 million won to 30 million won on July 16, but trading activity remained intense. On the day of the announcement, single-stock leveraged products accounted for 36.6% of total ETF trading volume, a share that has since stayed between 37% and 43%. Criticism is also growing, with some arguing that the authorities were seriously negligent in the product approval process, and voices are calling for a state compensation procedure to be initiated.
Retail Investors Trapped by Top-Ups, Losses Are Staggering
Numerous cases of heavy losses by individual investors are emerging online.
A 45-year-old office worker, identified as Kim, started with an investment of 7 million won in single-stock leveraged ETFs linked to SK Hynix and Samsung Electronics. Each time the stock price fell, he added more funds, believing it would help lower his average cost and allow a rebound to recoup losses. After five rounds of top-ups, his total investment ballooned to 34 million won, but his paper loss now exceeds 50%. "I kept buying more to get back to even, but I only fell deeper into the trap. Now I can neither sell nor buy," he said.
The experience of a 25-year-old university student, Choi, is similarly typical. He entered the market with 8 million won saved from part-time jobs. After semiconductor stocks fell, he took out a living expense loan to buy more single-stock leveraged ETFs, and now his account holds only about half of his original capital. "The speed of loss expansion is much faster and crueler than when making profits," he said.
On the workplace anonymous community "Blind," a bank employee posted that his investment portfolio, which started at 200 million won, once grew to 7 billion won. After heavily concentrating on Samsung Electronics, SK Hynix stocks, and single-stock leveraged ETFs, it shrank to about 2.2 billion won within a month. Yeo Kyung-ok, a Chinese cuisine chef who once won a real-money investment competition with a 750% return, also publicly disclosed his SK Hynix leveraged ETF account. An initial investment of about 120 million won is now valued at just 46 million won, representing a paper loss of approximately 74 million won, or 61.38%.
Structural Risks of Leveraged Products Were Underestimated
The mechanism of leveraged ETFs is the core reason for the continuous expansion of losses.
These products track twice the daily return of the underlying asset. If the underlying asset rises in a straight line, returns are amplified. However, in volatile, sideways markets, the "negative compounding" effect causes losses to accumulate. Even if the underlying asset eventually returns to its starting point, the leveraged ETF often cannot recover its value.
Bae Jae-kyu, CEO of Korea Investment Management, recently issued a public warning: "If the underlying stock fluctuates as violently as it does now, the leveraged ETF will accumulate losses every day. Even if the stock price returns to its original level, the ETF price will likely not recover." He bluntly advised investors, "Even now, do not invest in single-stock leveraged ETFs."
From an industry perspective, the retail investors' tendency to chase a single theme is another structural weakness that amplifies losses. The "RISE Donghak Ant" ETF, which tracks domestic retail buying trends, has risen only about 13% year-to-date, while the RISE KOSPI ETF has gained about 58% over the same period. The "KODEX US Seohak Ant" ETF, tracking overseas retail holdings, has fallen 2.7% year-to-date, while the KODEX US S&P500 ETF has risen 11.2%. Hana Securities ETF researcher Park Seung-jin pointed out that individual investors have a strong risk appetite, preferring momentum- and trend-based stock selection, which leads to significant drawdowns when the market reverses.
Controversy Over Hasty Product Launch, Calls for 'State Compensation'
The policy background of this crisis is also highly controversial.
These single-stock leveraged ETFs were launched on May 27, with the official goal of alleviating high exchange rate pressures, curbing capital outflows, and revitalizing the domestic stock market. However, after the products were listed, massive funds quickly concentrated on specific stock leveraged products. The mechanical rebalancing operations at the end of each trading day amplified price fluctuations in the underlying stocks, triggering the "Short Gamma" effect feared by market participants. Reports indicate that the net assets of related products reached 16 trillion won by the end of June, with a single-day trading volume once hitting 14 trillion won.
In response to the chaos, Financial Supervisory Service Governor Lee Chan-jin previously stated, "I regret it now. I should have tried my hardest to block the approval of the securities registration statement." This statement was seen by the outside world as an implicit admission of regulatory failure in the approval process.
Critics argue that the authorities hastily pushed forward without fully assessing the market impact and risk control mechanisms, leading to substantial asset losses for numerous retail investors. Some have explicitly called for the initiation of a state compensation mechanism for regulatory negligence and urged the National Assembly's Policy Committee to investigate the responsibility in the product approval process through inquiries and investigations. People Power Party lawmaker Kim Eun-hye stated that she is currently gathering opinions from affected investors and hopes the situation improves soon.
Regulatory Intervention Underway, Future Measures Pending
Financial authorities have clearly stated they will further tighten controls, but the specific extent remains to be seen.
The ruling party's K-Capital Market Special Committee held a closed-door meeting with securities firms and asset management companies on July 27, deciding to first observe the actual effects of existing measures, such as raising the basic margin requirement to 30 million won, before deciding on additional controls. The committee stated it is not considering forced delisting or reducing leverage multiples for now but reserves the right to take further action depending on market conditions.
Financial Services Commission Chairman Lee Eok-won, when meeting with representatives of securities firms and asset management companies on July 28, clearly stated, "If market demand does not sufficiently cool, we will consider further measures such as raising investment conditions or setting individual investment limits." He also promised to continue developing plans to help reduce market volatility and strengthen investor protection.
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