South Korea's financial regulator is backtracking on its recent approval of leveraged exchange-traded funds, labeling the decision "hasty" after a massive retail trading boom.
The Financial Supervisory Service (FSS) approved 16 single-stock leveraged ETFs in late May, offering double daily exposure to giants like Samsung Electronics and SK Hynix. Retail investors poured in, driving combined assets from $3 billion to $9.1 billion in just weeks.
The surge coincided with a record $39 billion in retail margin debt. Regulators had previously issued warnings and rules for foreign leveraged products but simultaneously approved these domestic ones, creating a contradiction.
The market impact was severe. The KOSPI index dropped nearly 10% on June 23rd, triggering a trading halt. Related leveraged products in Hong Kong fell even harder, with some dropping over 23%.
FSS Governor Lee Chan-jin acknowledged the ETFs played a role in the disruption. Regulators are now considering new measures to stabilize the market.
Financial experts warn these products are designed for short-term trading only. Their daily compounding can erode returns over time, even if the underlying stock remains flat.