South Korean Retail Investors Lose Billions in Leveraged ETFs

South Korean retail investors lost billions of dollars after allocating $9.4 billion to newly approved leveraged single-stock exchange-traded funds (ETFs) tracking Samsung Electronics and SK Hynix. The products were approved by the Financial Services Commission to entice domestic capital away from U.S. markets, but they instead exacerbated a market meltdown as AI skepticism and a tech correction hit chip stocks.

Due to daily rebalancing and volatility decay, these leveraged ETFs experienced losses between 40.2% and 49.4%, while the underlying stocks fell by significantly smaller margins. These products triggered volatility loops that further dragged down the KOSPI index.

Similar leveraged products tracking companies such as Tesla and Microsoft have amassed $65 billion in assets in the United States, primarily from retail investors. In response to warnings from its Investor Advisory Committee regarding the misunderstanding of compounding effects, the United States Securities and Exchange Commission is currently reviewing ETF rules regarding single-stock strategies and leverage.