(July 16): South Korea will temporarily halt new listings of single-stock leveraged exchange-traded products (ETFs) to curb market volatility after a surge in popularity of funds tied to Samsung Electronics Co and SK Hynix Inc.
The ban will remain in place until market conditions stabilise, the Financial Services Commission (FSC) said in a statement on Thursday. Authorities will also raise the minimum deposit requirement — or minimum account balance in cash required — for leveraged ETF trading to 30 million won (US$20,300 or $26,154) from 10 million won, expected to be implemented on Aug 5.
The measures mark Seoul’s most comprehensive effort yet to cool a retail trading frenzy that has transformed the US$4.1 trillion equity market into the world’s hottest and also one of the most turbulent. Announced after a meeting of regulators, Finance Ministry officials and central bankers, the rules follow growing worry that leveraged ETFs tied to Samsung and SK Hynix are causing excessive market swings.
“The products were initially launched domestically as they were rapidly growing overseas and we judged that local investment is necessary to enhance the appeal of South Korea’s capital market,” FSC director general Byun Je-Ho told reporters late on Thursday. “But since then, equity market volatility has increased.”
The products, along with the two chipmakers they track, have become so popular they now account for more than 70% of trading value after attracting a flood of retail money. Foreign investors, however, have grown increasingly cautious, selling more than US$100 billion worth in local shares this year alone.
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On Thursday, the Kospi Index fell 6.4%, while Samsung and SK Hynix each tumbled more than 8%. Since a June high, the benchmark has tumbled more than 25%. Volatility has surged alongside, with a 30-day gauge reaching unprecedented levels and daily moves of 5% or more becoming increasingly common.
While the tighter rules could dampen participation, some market participants said the trade-off may be worth it.
The measures are “highly likely to limit retail investors’ accessibility to leveraged ETFs to some extent”, said Jason Minsang Kam, the head of active equity management at Kyobo Life Insurance Co in Seoul. “From the perspective of retail investors, these tightened requirements are expected to have a positive effect on easing short-term volatility.”
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As part of the changes, regulators will also increase the mandatory training requirement for leveraged ETF investors to three hours from two, while raising the minimum trading lot size to 20 units from one. Authorities will also tighten control on discrepancies between the ETF’s market price and its net asset value, requiring liquidity providers to keep that gap at 2% from the current 3%.
Higher deposit rates also apply to overseas-listed leveraged ETFs, a move aimed at preventing investors from shifting into offshore assets, said the FSC’s Byun. The FSC added that if markets don’t stabilise, further measures could be considered.
Mounting concerns about South Korea’s market rally has appeared to reach the highest levels of government, with President Lee Jae Myung saying on Wednesday the stock market had become “quite unstable” following its unprecedented rally, and urging regulatory authorities to prepare follow-up steps.
ETF performance
Even as regulators move to curb speculative trading, and investors grow increasingly worried about stretched valuations and concentration risks in the artificial intelligence (AI) boom, there are few signs that demand is waning. Investors have continued to pour money into products linked to the theme, seeking new ways to capitalise on one of the strongest market rallies in recent history.
On Thursday, the top 10 most traded securities on Korea Exchange by trading volume were all leveraged or inverse ETFs tied to indices and the chip duo.
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Since debuting some two months ago, prices for more than a dozen leveraged ETFs in South Korea tracking Samsung and SK Hynix have slumped about 40%, according to data compiled by Bloomberg. Still, investors have continued to pour money into the products, with assets under management reaching more than US$10 billion at the June peak, according to Bloomberg Intelligence data.
The measures may help slow down product proliferation, but it doesn’t address the underlying issue about high investor appetite for AI exposure, according to Rebecca Sin, an ETF analyst at Bloomberg Intelligence.
“Recent market activity suggests that many investors continue to focus on the potential upside, even in the face of significant volatility and losses,” she said. “The willingness to ‘buy the dip’ despite sharp drawdowns highlights the strength of conviction around these themes.”
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