Leveraged ETFs need tighter safeguards

Korea's stock market is being swept up by speculative frenzy surrounding single-stock leveraged exchange-traded funds (ETF). Products that deliver double the daily returns of Samsung Electronics and SK hynix stocks surpassed a combined market capitalization of 15 trillion won ($9.9 billion) within a month of their launch, while cumulative trading value has reached 179 trillion won. They now account for roughly a quarter of all ETF trading.

The government originally introduced the products in hopes of drawing retail investors back from overseas markets, boosting the domestic stock market and helping stabilize the won. Instead, critics argue they have intensified market volatility. Financial Supervisory Service Gov. Lee Chan-jin recently acknowledged as much, saying regulators should have "lain down in front of the door" to stop their introduction.

Since the launch of what investors commonly call the "Samjeon-Nix ETFs," a portmanteau of the two companies' names in Korean, trading has increasingly resembled speculation. Institutional investors have poured into the products, joined by younger retail investors driven by FOMO, or the fear of missing out. When semiconductor stocks rally, enthusiasm surges. When they tumble, as they did earlier this week, losses mount just as quickly.

The rapid expansion of leveraged trading has become serious enough to draw concern from the Bank of Korea, which warned in its latest Financial Stability Report that higher interest rates may be needed to curb excessive borrowing for stock investment and to reduce risks to financial stability.

International media have also begun raising alarms. The Wall Street Journal argued that "the tail is wagging the dog," warning that Korea's ETF market is increasingly driving, rather than following, movements in underlying stocks. Bloomberg reported that recent weakness in the Nasdaq was exacerbated by selling pressure linked to leveraged ETFs tracking Samsung Electronics and SK hynix. Nikkei likewise warned that Korea's leveraged ETF boom could amplify instability in global equity markets at a time when concerns over an AI bubble and a semiconductor peak are resurfacing.

The greatest concern is market distortion. The average daily turnover ratio of single-stock ETFs exceeds 120 percent, more than 100 times that of the underlying shares. As short-term trading intensifies, price swings become increasingly detached from fundamentals, making the broader market more volatile.

The government should move quickly to strengthen safeguards. Margin requirements for leveraged ETF investments should be raised, while the current two-hour mandatory investor education program should be expanded. Investment limits based on investors' financial assets also deserve consideration. Regulators should further examine mechanisms to curb excessive trading during periods of market overheating and review whether leverage ratios should be adjusted when underlying assets experience unusually large price swings.