Retail investors in South Korea lost approximately 8.8337 trillion won in single-stock leveraged exchange-traded funds (ETFs) over nine trading days from July 1 to July 13, according to data from F&N Guide QuantiWise and Mirae Asset Securities. The losses occurred as KOSPI volatility intensified during this month, with assets under management (AUM) for four major Samsung Electronics and SK Hynix leveraged ETF products managed by Mirae Asset Management and Samsung Asset Management falling from 14.3518 trillion won on June 30 to 8.9389 trillion won on July 13, a decline of 37.72%. Market experts attribute the losses to a combination of heightened market volatility and mechanical rebalancing processes inherent to leveraged ETF structures, which amplified price swings in the underlying stocks and KOSPI index during the period.
Samsung Electronics and SK Hynix Leveraged ETF AUM Declined 37.72% Over Nine Trading Days
The four Samsung Electronics and SK Hynix single-stock leveraged ETF products saw their combined AUM drop from 14.3518 trillion won on June 30 to 8.9389 trillion won on July 13, representing a 37.72% decline. When expanding the scope to all 14 Samsung Electronics and SK Hynix leveraged ETFs listed on the Korean stock market, the combined AUM fell 41.40%, from 15.9349 trillion won at the end of June to 9.3386 trillion won on July 13.
By individual stock, Samsung Electronics leveraged ETF AUM decreased 35.29%, from 5.8195 trillion won to 3.7657 trillion won. SK Hynix leveraged ETF AUM declined 44.91%, from 10.1154 trillion won to 5.5729 trillion won, effectively halving in value. The cumulative evaluation loss for the nine trading days from July 1 to July 13 totaled 8.8337 trillion won. Despite the index plunge, retail investor buying continued steadily, but losses exceeded double the index decline magnitude, resulting in over 8.8 trillion won of retail capital evaporating from the market within nine trading days.
Mechanical Rebalancing and Derivative Market Activity Amplified KOSPI Volatility
Market experts identified leveraged ETF purchases by retail investors as a driver of volatility in the KOSPI spot index, beyond individual investment losses. When retail investors purchase leveraged ETF products, asset management firms and liquidity providers (securities firms acting as LPs) buy large volumes of futures in the derivatives market to achieve double the daily return. Large-scale futures buying pushes futures prices above spot prices or causes the futures index itself to surge.
As the price gap between futures and spot widens, institutional and foreign arbitrage trading (futures sell + spot buy) program buying floods in. Program buying pushes up KOSPI large-cap stocks, artificially raising the spot index. The problem intensifies when the index plunges: leveraged ETF selling leads to futures selling and futures price declines, which in turn trigger program selling that exerts additional downward pressure on spot prices.
Leveraged ETFs must conduct asset rebalancing trades at the market close daily to achieve double the daily return. This results in abnormally concentrated mechanical buy and sell orders in the futures market at the end of trading sessions, further increasing volatility in the final minutes of trading.
Experts Link Leveraged ETF Structure to Market Distortions
Noh Dong-gil, a researcher at Shinhan Investment & Securities, stated, "2x leveraged ETFs must sell more stocks in a falling market, and inverse ETFs must take additional short positions to match increased assets." He added, "Single-stock products concentrate selling in specific large-cap stocks rather than dispersing it, and the structure requiring more mechanical selling as prices fall is overlapping to deliver a major shock to the market."
An official from a domestic asset management firm explained, "As a large number of leveraged products targeting individual investors' desire to maximize returns have emerged, the phenomenon of the derivatives market shaking the spot market has intensified." The official continued, "The entire domestic market is experiencing repeated sharp rises and falls due to mechanical trading, unrelated to corporate fundamentals."
FAQ
What caused the 8.8 trillion won loss in Korean leveraged ETFs from July 1 to July 13?
Retail investors lost approximately 8.8337 trillion won in Samsung Electronics and SK Hynix single-stock leveraged ETFs over nine trading days from July 1 to July 13 due to intensified KOSPI volatility and mechanical rebalancing processes. The four major leveraged ETF products saw AUM decline 37.72%, from 14.3518 trillion won on June 30 to 8.9389 trillion won on July 13.
How did leveraged ETF rebalancing affect KOSPI volatility during this period?
Leveraged ETFs require daily asset rebalancing at market close to achieve double the daily return, resulting in concentrated mechanical buy and sell orders in the futures market. When retail investors purchased leveraged ETFs, asset managers bought large futures volumes, pushing futures prices above spot prices and triggering arbitrage program buying that artificially raised the KOSPI spot index. Conversely, during index declines, leveraged ETF selling led to futures selling and program selling, exerting additional downward pressure on spot prices and amplifying volatility.
