Stock prices of Samsung Electronics and SK hynix are projected on the right side of a digital screen in a trading room in central Seoul on May 21. [YONHAP]
The opportunity to double investments has made exchange-traded funds (ETF) more attractive than ever amid the continuing chip rally, but for products linked to a single stock, losses can multiply even if the price never falls below the buy-in price.
On Wednesday, 18 leveraged and inverse single-stock ETF and exchange-traded note products tied to Samsung Electronics and SK hynix will debut on the same day, marking the first time in Korean capital market history that leveraged products focused on individual stocks have been listed. It even includes products designed to deliver returns that are double the daily price movement of the two chipmakers’ shares.
While leverage can magnify gains with relatively small amounts of capital, it can also amplify losses when stocks stall or move lower.
For starters, the soon-to-debut products invest in just one stock — either Samsung Electronics and SK hynix.
Unlike conventional ETFs tied to broader indexes, they offer no diversification, leaving investors fully exposed to company-specific risks. That means volatility can swing wildly depending on the global semiconductor cycle or the firms’ earnings performance.
A graph shows a surge in inflows into a leveraged SK hynix exchange-traded fund in Hong Kong. [Bloomberg]
Given that Korea’s daily stock price fluctuations are capped at plus or minus 30 percent, investors could theoretically suffer losses of as much as 60 percent in a single trading session — in the case of investing in 2x ETF products. In Britain, there was even a case in which investors in a triple-leveraged single-stock product lost their entire investment in a day after the underlying asset plunged.
Another major risk is what is known as the “negative compounding effect.”
Leveraged products are structured to mechanically deliver double the daily return of the underlying asset. When a stock repeatedly rises and falls, investors can still lose money even if the share price ultimately returns to its original level.
For example, if a standard ETF tracking an underlying asset climbs 30 percent and then returns to its previous value, the investor ultimately preserves the original principal as the fall is less than 30 percent based on the higher value.
However, with a 2x leveraged ETF amplifying gains and losses twofold, a 30 percent increase and return to the original value — with the loss doubled — would see the holdings fall below the original investment.
A graph shows soaring volatilityin Samsung Electronics and SK hynix shares. [BLOOMBERG]
With repeated losses, investors can see their capital steadily erode even in a sideways market if volatility persists. Financial regulators say that is precisely why such products should be used only for short-term trading.
Because the funds must rebalance daily to maintain their target leverage ratio, management fees also tend to be higher than those of conventional ETFs. While the conventional ETF products tied to indexes charge a fee of 0.05 percent to 0.2 percent annually, the single-stock ETF product charges around 0.09 percent to 0.49 percent.
“Investors should first understand that the potential for losses can exceed the potential for doubled returns,” said Lee Myeong-jin, head of financial investment education at the Korea Financial Investment Association.
Despite the heightened risks, the market seems to be filled with eager investors.
To invest, individuals must complete two hours of online preinvestment education and maintain a minimum deposit of 10 million won ($6,600). The number of applicants for the mandatory training had already reached 100,000 as of Thursday, according to the Korea Financial Investment Association.
The Financial Supervisory Service has moved to curb overheated marketing. Regulators have effectively barred asset managers and brokerages from holding promotional events designed to lure investors into the products.
Memory chips by semiconductor supplier SK hynix are seen on a circuit board of a computer in this photograph from February 25, 2022. [REUTERS/YONHAP]
Some observers voice concerns that it could even increase volatility in the Kospi and intensify the Korean stock market’s dependency on Samsung Electronics and SK hynix.
“The product in question is likely to intensify volatility by concentrating trading flows near market closing time,” said Ha Jae-soek, an Analyst at NH Investment & Securities.
Rebalancing transactions tied to Hong Kong-listed ETFs linked to Korean chipmakers accounted for 60 percent of SK hynix’s trading volume during an hour before the market close on March 3, when the share price dropped more than 10 percent, according to a note from UBS, which was later obtained by Bloomberg.
“The launch of the leveraged product would deepen the risk of concentration in a handful of stocks,” said Yun Jung-in, chief executive officer at Fibonacci Asset Management Global. “If heightened volatility persists, the Korean stock market could become increasingly difficult for long-term investors.”
Yet others believe the ETF products could be a driving force to lead Kospi rallies. Mirae Asset Global Investments estimated that 5.3 trillion won could flow into the market after the listing of the ETF products.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
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