Lee Tae-yong, NEOS Asia Strategy Head and co-founder who developed America's first leveraged exchange-traded fund, emphasized on the 28th that Korea's leveraged ETF market requires active regulatory intervention and investor protection mechanisms due to high product concentration. In a phone interview with Yonhap Infomax, Lee stated that Korea differs from the US in having significant concentration in certain stocks and strong retail investor preference for high-leverage products. Lee, who previously served as CEO of Mirae Asset Asset Management, spent six years securing US Securities and Exchange Commission approval for the first leveraged ETF while at ProShares, launching over 60 ETFs based on indices including the S&P 500 and Nasdaq 100 by 2008.
Lee Tae-yong Calls for Active Regulatory Intervention in Korean Leveraged ETF Market
Lee stated that authorities should focus on which underlying assets leveraged ETFs apply leverage to and which market the products belong to, rather than focusing on leveraged ETFs themselves. He said, "While aligning regulations with advanced countries like the US is important, unique characteristics of each country should have been considered before launch." Lee explained that the US market is large and institutional investors such as hedge funds primarily used the products in the early stages, so no major problems emerged over the past 20 years. In contrast, Korea has significant concentration in certain stocks and strong retail investor preference for high-leverage products.
Lee acknowledged that concentration in single-stock leveraged ETFs could have been anticipated to some degree if various circumstances had been considered. However, he emphasized, "Concentration has already become reality. Rather than questioning the appropriateness of ETF launches or debating responsibility, it is important for authorities to actively intervene and establish investor protection mechanisms."
ProShares Established Internal Policy Against Marketing Leveraged ETFs to Retail Investors
Lee explained that when ProShares first introduced leveraged ETFs, the company established an internal policy not to market these products to retail investors. While investment was open to everyone including retail investors, the asset manager deliberately chose not to stimulate demand. Lee stated, "Unlike futures or options, ETFs are open products with almost no entry barriers. Once listed on an exchange, anyone can buy and sell them like stocks, so we believed that for high-risk products, asset managers should not encourage retail demand."
Lee developed the first leveraged product starting in 2002 and it took approximately six years to receive SEC approval. After countless exchanges with authorities, the sentiment when the product first listed was exceptional. He subsequently led the launch of over 60 ETFs with various indices as underlying assets, including the S&P 500 and Nasdaq 100, through 2008. During his tenure as CEO of Mirae Asset Asset Management, he expanded the global ETF business to six countries: Korea, the US, Canada, Australia, Hong Kong, and Colombia. He was appointed as Waveridge Global Strategy Head in 2021 and established US asset manager NEOS, where he currently oversees Asian advisors.
Lee Warns Korean Authorities Must Monitor Online ETF Marketing and Advertising
Lee expressed concern about ETF advertisements flooding through domestic YouTube official accounts and fininfluencer channels. He stated, "It is urgent to create a system that supervises online marketing and advertising targeting retail investors that has flourished in recent years. The Financial Supervisory Service and other authorities must step forward and effectively manage and supervise how ETFs are being sold."
Lee emphasized that pre-launch screening of products must also be cautious. Even if there is market demand for a product, authorities must carefully examine whether the underlying assets to which leverage is applied have sufficient capacity to withstand it and whether the impact on the market will be significant. He advised, "Korea has very aggressive retail investor tendencies and correspondingly high concentration in leveraged products, so proactive and systematic management by authorities is necessary. We must guard against indiscriminate product launches and mindless investment by retail investors who do not fully understand product risks."
SEC Simplifies Approval for Similar ETF Structures but Faces New Challenges
Lee explained that the US SEC has operated a market-friendly system that significantly simplifies approval procedures and timeframes for ETFs with the same or similar structures as existing products. However, he noted, "Recently, some asset managers have abused this to indiscriminately launch high-risk products." Lee stated, "Because of this, the risks of single-stock leveraged ETFs and ETFs utilizing derivatives such as options, as well as the possibility of market distortion, have become hot topics in the US, and intervention by authorities such as the SEC has begun again."
Lee explained that Korea should learn from the US case as a lesson. He stated that Korea needs preemptive and systematic management by authorities because retail investors have very aggressive tendencies and correspondingly high concentration in leveraged products.
FAQ
What did Lee Tae-yong emphasize about Korea's leveraged ETF market on the 28th?
Lee Tae-yong emphasized that Korea's leveraged ETF market requires active regulatory intervention and investor protection mechanisms due to high product concentration. He stated in a phone interview with Yonhap Infomax that Korea differs from the US in having significant concentration in certain stocks and strong retail investor preference for high-leverage products.
What internal policy did ProShares establish when first introducing leveraged ETFs?
ProShares established an internal policy not to market leveraged ETFs to retail investors when first introducing the products. Lee explained that while investment was open to everyone, the asset manager deliberately chose not to stimulate demand, believing that for high-risk products, asset managers should not encourage retail demand since ETFs are open products with almost no entry barriers that anyone can buy and sell like stocks once listed on an exchange.
