Single-stock leveraged exchange-traded funds (ETFs) tracking Samsung Electronics and SK Hynix in the Korean stocks market saw capital inflows slow sharply in the recent 1 week, with only 53.4 billion won entering 14 such products, according to the Korea Economic Daily on the 24th — a stark contrast to the 6.5 trillion won inflow over the recent 1 month and cumulative 13 trillion won since their May 27 launch. The slowdown coincided with government regulatory tightening and a market correction that triggered outflows from major products including KODEX SK Hynix single-stock leverage (9.8 billion won net outflow in recent 1 week) and KODEX Samsung Electronics single-stock leverage (75 billion won outflow). The products, introduced on May 27 with the goal of exchange rate stabilization, have been blamed for extreme capital concentration and stock market volatility, prompting authorities to announce on the 16th — 50 days after launch — a package of measures including tripling the basic deposit requirement from 10 million won to 30 million won starting the 31st.
Individual Investors Shift from Net Buying to Net Selling in Major Products
Individual investor behavior confirmed the inflow slowdown. According to the Korea Exchange, individuals net sold approximately 159 billion won of KODEX SK Hynix single-stock leverage from the 20th to the 23rd. They also sold approximately 45 billion won worth of KODEX Samsung Electronics single-stock leverage during the same period. In TIGER SK Hynix single-stock leverage, which saw approximately 190 billion won in net inflows, foreign investors were net buyers while individuals net sold 79 billion won. Securities industry analysts view the reduced inflows as a normalization process for overheated speculative demand, with an atmosphere spreading that places greater weight on volatility management.
Financial Authorities Raise Basic Deposit Requirement to 30 Million Won Starting the 31st
Financial authorities announced the "Single-Stock Leveraged Product (ETF/ETN) Supplementary Measures" based on discussions at a market situation review meeting chaired by the Deputy Prime Minister for Economic Affairs on the 16th. The basic deposit requirement related to single-stock leveraged products increases from the current 10 million won to 30 million won starting the 31st. Previously, not only cash in the account but also 70% of the market value of substitute securities such as stocks, ETFs, and bonds were included in the basic deposit calculation, but going forward only cash will be recognized as basic deposit. Authorities also decided to improve the current system that recognizes substitute securities such as stocks and bonds as equivalent to cash immediately upon sale (T day) for basic deposit purposes. For single-stock leveraged products only, the improvement will recognize cash deposits only on the day cash is actually deposited (T+2 day) after securities sale, preventing round-trip trading of such products. The measure to adjust trading quantity units (from 1 share to 20 shares), scheduled for implementation in November, will be pursued for early implementation. Measures to strengthen securities firms' and asset managers' responsibility for managing tracking error and to strengthen tracking error management by shortening the procedure for designating investment caution items will be implemented from August 19 after going through exchange regulation and enforcement rule revision procedures.
Public Poll Shows 63.7% View Introduction as Wrong Decision
A public opinion poll showed negative evaluations of the introduction of single-stock leveraged ETFs, which have been blamed as the main culprits of extreme capital concentration and stock market volatility since launch, outnumbered positive evaluations. According to a survey conducted by Realmeter on the 22nd, commissioned by The Today, targeting 504 people aged 18 and over nationwide, 63.7% of responses said the introduction of single-stock leveraged ETFs was a "wrong decision." "Very wrong decision" accounted for 41.2%, and "generally wrong decision" accounted for 22.5%.
Goldman Sachs and JPMorgan Attribute Market Volatility to Leveraged ETF Deleveraging
Foreign media and global investment banks evaluated that the Korean stock market has become a real-time experimental ground where volatility is amplified by leveraged ETFs. Goldman Sachs analyzed in a report titled "KOSPI Tests Major Technical Support Line" that "the rapid deleveraging (forced selling) of recently launched single-stock leveraged ETFs amplified intraday volatility." The explanation is that as some leveraged ETFs declined, asset managers sold additional underlying assets to meet target leverage multiples, and in this process a vicious cycle emerged where stock price declines again triggered selling. Global investment bank JPMorgan also analyzed that leveraged ETF deleveraging further increased market volatility during the recent sharp decline in the Korean stock market. It cited the government's increase in basic deposits, mandatory cash margin, and suspension of new listings of single-stock leveraged ETFs as additional deleveraging factors. The market analyzes that the recent slowdown in single-stock leveraged fund inflows is the result of government regulatory effects combined with investor sentiment dampened by the sharp decline.
FAQ
What caused the slowdown in capital inflows to Korean stocks leveraged ETFs in the recent 1 week?
The slowdown resulted from government regulatory tightening announced on the 16th and a market correction. Recent 1-week inflows to 14 single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix totaled only 53.4 billion won, compared to 6.5 trillion won over the recent 1 month and cumulative 13 trillion won since their May 27 launch.
What regulatory changes did Korean financial authorities announce for single-stock leveraged products?
Authorities announced on the 16th that the basic deposit requirement increases from 10 million won to 30 million won starting the 31st, with only cash recognized (no substitute securities). They also decided to recognize cash deposits only on T+2 day after securities sale for single-stock leveraged products, and plan early implementation of trading quantity unit adjustments from 1 share to 20 shares.
How did global investment banks assess the impact of leveraged ETFs on Korean stock market volatility?
Goldman Sachs stated in a report that "the rapid deleveraging of recently launched single-stock leveraged ETFs amplified intraday volatility." JPMorgan analyzed that leveraged ETF deleveraging further increased market volatility during the recent sharp decline in the Korean stock market, citing government regulations as additional deleveraging factors.
