Bae Jae-kyu, CEO of Korea Investment Management, has issued a rare and public warning to investors, urging them to divest from single-stock leveraged exchange-traded funds (ETFs) tied to major tech companies like Samsung Electronics and SK hynix. In a social media post, Bae expressed regret over the products, which his own firm operates, citing the dangers of “volatility drag” that can cause losses to compound rapidly.
The warning highlights the risks inherent in products designed to deliver two or three times the daily return of an underlying asset. Using SK hynix as a primary example, Bae noted that while the stock fell 17.9 percent between May 27 and July 16, a leveraged ETF tracking the stock plummeted 47.5 percent. This disparity occurs because each decline necessitates a disproportionately larger rebound to reach the original value, a phenomenon that can leave investors in a permanent loss position even if the underlying asset recovers.
The impact of these ETFs extends beyond individual portfolios. Because Samsung Electronics and SK hynix are cornerstones of the KOSPI market capitalization, the daily hedging and rebalancing activities required by these funds can exacerbate volatility across the broader Korean stock market. This has prompted academic criticism, with experts like Choi Chul of Sookmyung Women’s University questioning if such instruments encourage speculative gambling over sound investment.
President Lee Jae Myung addressed the situation during a Cabinet meeting on Tuesday, acknowledging the government’s role in the market. While financial authorities initially introduced these products to encourage domestic trading, the President stated that the government must now take corrective action. Current measures, such as tripling deposit requirements, are being evaluated, with the President calling for swifter and more decisive regulatory steps to protect retail investors from further exposure.