South Korea’s finance minister offered a public apology on Wednesday after retail investors suffered devastating losses from leveraged exchange-traded funds that were introduced just weeks ago, turning what was meant to be a milestone for the country’s financial markets into a painful episode for everyday traders.
Finance Minister Koo Yun-cheol bowed to lawmakers’ demands for an apology during a parliamentary session, acknowledging that single-stock leveraged ETFs were rolled out earlier this year without sufficient consideration of the risks they posed to retail investors. The products, which debuted on May 27, were designed to deliver twice the daily price movement of individual stocks, making them especially volatile in turbulent markets.
Korean retail investors eagerly embraced the new offerings, pouring a net 14 trillion won, or roughly 9.7 billion dollars, into leveraged ETFs according to data from KB Financial Group. Foreign investors, by contrast, committed only about 2 trillion won, suggesting that local traders bore the brunt of the exposure when markets turned sour. The speculative frenzy had helped fuel one of the world’s hottest equity rallies, but the momentum reversed sharply as chip stocks led a brutal correction in the Kospi index, which has plunged nearly 35 percent over the past month.
The damage has been most severe for investors who bet on leveraged products tied to semiconductor giants Samsung Electronics and SK Hynix, both of which had been darlings of the artificial intelligence rally. The KODEX SK Hynix Single Stock Leverage ETF has collapsed more than 80 percent from its June 23 peak, while the equivalent Samsung-tracking product has fallen nearly 75 percent from its early June high, according to LSEG data.
Financial Services Commission chairman Lee Eog-weon told lawmakers that regulators are now considering restricting access to the products so that only professional investors can purchase them. He also raised the possibility of lowering the leverage multiple from its current level of two times, saying that such a move would likely help ease volatility going forward.
