3x Samsung Electronics, SK Hynix Leverage Products Debut Overseas as Korea Rules Lag

First 3x ETPs tied to Samsung Electronics and SK Hynix list in London

In the US, 2x ETFs tied to Samsung Electro-Mechanics and Hyundai Motor are in registration

Tighter Korean rules raise concerns demand could shift overseas

Leveraged exchange-traded products tied to individual South Korean stocks are increasingly being launched overseas. In London, the first 3x leveraged products linked to Samsung Electronics Co. and SK Hynix Inc. began trading. In the US, issuers are also moving ahead with 2x leveraged ETFs tied to Samsung Electro-Mechanics Co. and Hyundai Motor Co. By contrast, South Korea allows only Samsung Electronics and SK Hynix as underlying assets for leveraged ETFs, highlighting a clear regulatory gap.

According to the financial investment industry on June 12, Samsung Electronics 3x Long ETP, ticker SMG3, and SK Hynix 3x Long ETP, ticker HNX3, listed that day on the London Stock Exchange. It is the first time products offering 3x leveraged exposure to individual South Korean stocks have appeared in the global market.

The products trade in US dollars in London, but the exposure is implemented through the Korea Exchange's won-denominated futures market. Daily profit and loss is settled in won and then reflected in the US dollar-based net asset value after applying the exchange rate. Only 3x long products were launched initially, with no inverse versions. Leverage Shares, which manages the products, said it is expanding its lineup in response to growing global investor demand for exposure to South Korean equities.

Moves to launch leveraged ETFs tied to South Korean stocks are also gathering pace in the US. ProShares, a US ETF issuer, recently registered Ultra SK Hynix with the Securities and Exchange Commission. The fund is designed to deliver twice the daily return of SK Hynix American depositary receipts.

The firm also filed registration documents this month for Ultra Samsung Electro-Mechanics and Ultra Hyundai. Under South Korean rules, Samsung Electro-Mechanics and Hyundai Motor cannot serve as underlying assets for single-stock leveraged ETFs. That means products not permitted in South Korea are already going through the launch process in the US first.

Separately, Rex Shares filed for a 2x leveraged ETF tied to SK Hynix, while XETF submitted SEC filings for a basket ETF made up of South Korean semiconductor value-chain stocks and a 2x leveraged version of that product.

South Korea introduced single-stock leveraged ETFs last year after revising an enforcement decree under the Capital Markets Act. But the eligibility requirements for underlying assets remain strict. A stock must account for at least 10% of Kospi market capitalization, at least 5% of trading value, hold an investment-grade credit rating and represent at least 1% of derivatives trading. Leverage is also capped at plus or minus two times.

Only Samsung Electronics and SK Hynix currently meet those standards. Samsung Electro-Mechanics, despite a recent surge in market capitalization, still accounts for about 2% of the Kospi and remains ineligible.

An industry official said South Korean authorities have limited leveraged products in the name of investor protection even as overseas markets continue launching leveraged vehicles tied to South Korean stocks. That has increased the possibility that domestic capital could move abroad. The official added that the market is watching whether more single-stock leveraged products will be allowed.

Jeon Ye-jin, Hankyung.com reporter, ace@hankyung.com