Korea's Samsung, SK hynix ETFs were supposed to bring money back. They haven't seemed to work.

When Korea rolled out single-stock leveraged exchange-traded funds (ETF) tied to Samsung Electronics and SK hynix, there were hopes that the products would keep domestic investors' money in the local stock market.

Since launching, however, the funds have appeared to merely amplify market volatility, while demand for similar Hong Kong-listed products shows little sign of abating.

While regulators aimed to stabilize the won by reducing capital outflows, Korean investors purchased $117.64 million worth of the Hong Kong-listed 2x leveraged SK hynix ETF and $64.48 million worth of the Samsung Electronics equivalent between May 27, when the Korean ETFs hit the market, and June 23, according to data from the Korea Securities Depository Wednesday.

The two funds ranked first and second among all Hong Kong-listed stocks and ETFs purchased by Korean investors during those 19 days.

The sums represent increases of 489 percent and 224 percent, respectively, compared with the same number of trading days in January. Between January and May, Korean investors net pumped $311.8 million into the leveraged SK hynix ETF and $211.1 million into the Samsung Electronics fund on the Hong Kong exchange.

Market observers say demand from Korean retail investors has continued because the Hong Kong products are not subject to the same restraints applied in the domestic leverage market, such as minimum deposit thresholds and mandatory investor education. Investors can also potentially benefit from gains on dollar-denominated assets if they invest in the Hong Kong market.

Assets under management of the SK hynix 2x leveraged ETF rose from 67.78 billion Hong Kong dollars ($8.65 billion) on May 26, the day before the Korean product launched, to 95.93 billion Hong Kong dollars on June 23, up 41.5 percent, according to Bloomberg data.

The Samsung Electronics 2x leveraged ETF posted similar growth, with assets under management climbing 28.5 percent from 20.16 billion Hong Kong dollars to 25.91 billion Hong Kong dollars during the same period.

The number of shares outstanding, a more direct measure of investor flows, also increased.

The total number of shares of the SK hynix 2x leveraged ETF rose 12 percent from 624 million to 698.5 million, while those of the Samsung Electronics 2x leveraged ETF climbed 28.8 percent from 128.5 million to 165.5 million, suggesting that demand for the Hong Kong products remained robust even after Korea launched comparable funds.

The figures have led some analysts to conclude that regulators have fallen short of their goal of reshoring investments, one of the main justifications for allowing single-stock leveraged ETFs. 

The currency-stabilization effect touted by regulators as a key benefit of the products has yet to become evident.

The won weakened further on Wednesday. The dollar-won exchange rate closed at 1,541.8, up 2.7 won from the previous session. It marked the first time the currency closed above the 1,540 won level since March 9, 2009, during the global financial crisis, when it ended at 1,549 won.

In fact, concerns about potential side effects have only intensified.

When the Kospi plunged nearly 10 percent on Tuesday, the average loss among seven Samsung Electronics leveraged ETFs reached 24.6 percent, while seven SK hynix leveraged ETFs fell an average of 25.6 percent — roughly double the declines recorded by the underlying stocks, which dropped 12.31 percent and 12.47 percent, respectively. 

Overseas media outlets also pointed to leveraged ETFs as a factor that amplified market volatility.

“What started as a modest risk-off session […] morphed into a rout, with foreign investors offloading more than $2.5 billion of Kospi shares,” Bloomberg said Tuesday. “Market watchers cited a combination of forced liquidation hitting retail investors trading on borrowed money, compounded by a wave of selling tied to leveraged exchange-traded funds tracking [Samsung Electronics and SK hynix].”

Financial Supervisory Service (FSS) Gov. Lee Chan-jin's remark on Monday that regulators should have "stopped them even if it meant lying down in front of them" appears to reflect the growing view that the products have failed to deliver the policy benefits originally expected. 

In response, the FSS and the Korea Financial Investment Association convened an emergency meeting on Wednesday with chief risk officers from the country's 10 largest securities firms to discuss risk management and investor protection measures.

Industry participants say possible follow-up measures include stricter suitability requirements, tighter restrictions on advertising and marketing and a suspension of approvals for new products.

Meanwhile, the benchmark Kospi rebounded sharply on Wednesday to close at 8,471.02, up 267.18 points, or 3.26 percent. The tech-heavy Kosdaq finished at 909.31, gaining 17.79 points, or 2 percent.

As Korean stocks continued to swing wildly between steep losses and gains, the Kospi 200 Volatility Index, often referred to as Korea's fear index, surged 9.36 percent during the session to an intraday high of 97.78 before closing at 94.81. The closing level was the highest since the Korea Exchange began officially publishing the index in April 2009.

BY KIM DA-YOUNG [[email protected]]