(June 22): South Korea’s top financial regulator said he regrets not blocking the launch of leveraged exchange-traded funds (ETFs) tracking single stocks last month, warning their negative side effects have grown significantly.
Alongside strengthening monitoring of trading patterns, officials are weighing other stabilisation steps to limit the potential fallout from sharp swings in ETFs tracking Samsung Electronics Co and SK Hynix Inc, Financial Supervisory Service (FSS) Governor Lee Chan-jin said in a briefing Monday. The FSS said current policy deliberations apply only to domestic ETFs tracking the stocks.
“At that time, the stock market had risen significantly, causing concerns,” Lee said. “Half-joking, but I should have just stayed put then, and I have a lot of regrets. Reflecting on the situation, wondering if I should have laid down to protest the launch by any means necessary to block it then.”
The comments highlight the risks tied to high-octane AI trades in a nation seen as a cornerstone of the global tech supply chain. Gains in Samsung and SK Hynix, both at the forefront of chips needed for AI, have fuelled strong demand for leveraged ETFs tracking their stocks. While such ETFs can amplify returns, concerns have grown that they are adding volatility to the world’s best-performing market.
Officials from the FSS are working with counterparts in the Financial Services Commission and the Korea Exchange, Lee said.
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Leveraged ETFs let investors pursue outsized returns on stocks and other assets by using derivatives and swap contracts. They can also exacerbate swings as issuers often need to rapidly buy or sell assets to keep the funds aligned with their promised leverage ratios.
At their launch in late May, the 16 ETFs tracking the chipmakers in Korea had combined assets of US$3 billion ($3.88 billion), but Lee said Monday their assets have grown to about 14 trillion won (US$9.1 billion or $12 billion).
“These are high-risk products, and it seems like about 92% of holders are retail investors,” Lee said. “Despite consumer warnings, trading hasn’t cooled.”
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The Korean products were launched after some similar products in Hong Kong became wildly popular. Since its debut in October, Hong Kong-listed CSOP SK Hynix Daily 2x Leveraged Product rapidly became the world’s largest product of its kind. The fund’s assets have soared to more than US$14 billion as of Monday.
Lee explained that the local ETFs were designed to draw Korean investors away from leveraged products in Hong Kong. “But that doesn’t appear to have been very effective,” he added.
The launch of leveraged ETFs tracking Korean stocks is a new structural dynamic that “has become more important than ever in the market”, according to a note from Goldman Sachs Group Inc.
The broker estimates a 5% swing in the Korean stock market could trigger about US$4.7 billion in rebalancing flows by option dealers as they adjust their risk exposure. This amount represents about one-eighth of all shares traded on a normal day.
Uploaded by Chng Shear Lane
