Samsung Electronics and SK Hynix single-stock leveraged exchange-traded funds (ETFs) faced mounting controversy as investor losses intensified and political calls for delisting emerged. Lawmaker Ahn Cheol-soo posted on Facebook on the 6th demanding the delisting of these products, stating that 212 trillion won in funds concentrated in these ETFs amplified stock price volatility. Deputy Prime Minister Koo Yun-chul addressed the concerns at a July 7 parliamentary Finance and Economy Committee meeting, confirming that authorities are monitoring the situation. The controversy stems from the negative compounding effect inherent in leveraged products, which magnified losses as Samsung Electronics fell 6.92% on July 7 despite announcing record second-quarter earnings, with 82% of Samsung ETF investors and over 90% of SK Hynix ETF investors in loss positions. Korean stocks have experienced heightened volatility due to the outsized influence of Samsung Electronics and SK Hynix in the KOSPI index, with these two companies' leveraged ETFs now accounting for three of the top five ETF products by trading volume.
Investors Record Heavy Losses in Samsung and SK Hynix Leveraged ETFs
According to NH Investment & Securities' NH Data service, 82% of KODEX Samsung Electronics Leveraged ETF investors were in loss positions when the ETF closed at 21,220 won. For KODEX SK Hynix Leveraged ETF, over 90% of investors recorded losses at a closing price of 25,310 won. All 14 Samsung Electronics and SK Hynix leveraged ETFs recorded negative returns over the past month, with the maximum loss rate reaching 35.9%, according to Ahn Cheol-soo's Facebook post on the 6th.
Samsung Electronics and SK Hynix stock prices declined 18.3% and 24.5% respectively from their highs as of July 8 since the single-stock leveraged ETF launch. Samsung Electronics fell 6.92% on July 7 following its second-quarter earnings announcement and dropped over 7% intraday the next day. The leveraged products' structure of tracking 2x daily returns created negative compounding effects during volatile market conditions.
Single-stock leveraged ETFs recorded average daily trading volume of approximately 9.6 trillion won with a turnover rate of 105.3%, according to the financial investment industry. From May 27 to July 8, these products generated total trading volume of 249.3 trillion won. Three of the top five ETF products by trading volume were Samsung Electronics and SK Hynix single-stock leveraged ETFs.
Financial Authorities and Politicians Respond to ETF Controversy
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-chul stated at the July 7 parliamentary Finance and Economy Committee meeting, "We are well aware of concerns that leveraged ETFs are bringing volatility to the stock market. Related agencies are closely monitoring and observing various situations."
The Bank of Korea submitted a written response to parliament analyzing that single-stock leveraged ETFs could intensify concentration in specific stocks and expand market volatility through the rebalancing process. The central bank stated, "Especially during stock price corrections, these products can act as a factor expanding stock price volatility through increased individual investor losses as well as redemptions and position rebalancing."
Financial Supervisory Service Governor Lee Chan-jin expressed regret at a previous regular press conference, stating, "I personally reflect on whether we should have blocked it even by lying down," publicly acknowledging disappointment with the product introduction process. Lawmaker Ahn Cheol-soo wrote on Facebook on the 6th, "KOSPI has degenerated into a casino," emphasizing that 212 trillion won in funds concentrated in Samsung Electronics and SK Hynix leveraged ETFs amplify stock price volatility, calling the products policy failures.
Regulators Consider Access Restrictions Over Delisting
Actual delisting of these ETFs remains unlikely according to industry consensus, as domestic ETFs can only be delisted when they meet requirements specified in laws and exchange regulations, including sustained divergence between net asset value and underlying index beyond certain thresholds, absence of liquidity providers, trust termination, or delisting of underlying assets. Samsung Electronics and SK Hynix, as Korea's largest market capitalization stocks, face virtually no delisting risk, and current fund operations and liquidity provision show no problems, according to a securities firm official.
Regulatory reforms are more likely to focus on raising entry barriers for investors rather than immediate delisting. Potential measures under discussion include raising the basic deposit requirement from the current 10 million won level to 300 million won or restricting trading to professional investors only. These approaches mirror past regulatory tightening of the equity-linked warrant (ELW) market to cool excessive trading.
FAQ
What percentage of Samsung Electronics and SK Hynix leveraged ETF investors are in loss positions?
82% of KODEX Samsung Electronics Leveraged ETF investors were in loss positions when the ETF closed at 21,220 won, according to NH Investment & Securities' NH Data service. For KODEX SK Hynix Leveraged ETF, over 90% of investors recorded losses at a closing price of 25,310 won.
What regulatory changes are authorities considering for single-stock leveraged ETFs?
Authorities are discussing raising entry barriers rather than delisting, including increasing the basic deposit requirement from the current 10 million won level to 300 million won or restricting trading to professional investors only. Deputy Prime Minister Koo Yun-chul confirmed at a July 7 parliamentary committee meeting that related agencies are monitoring the situation.
How much trading volume have Samsung and SK Hynix leveraged ETFs generated?
From May 27 to July 8, Samsung Electronics and SK Hynix single-stock leveraged ETFs generated total trading volume of 249.3 trillion won. Average daily trading volume reached approximately 9.6 trillion won with a turnover rate of 105.3%.
