Samsung, SK Hynix Single-Stock Leveraged ETFs Draw $5.3 Billion in a Month as South Korea Tightens Rules

More than 7.3 trillion won ($5.3 billion) flowed into single-stock leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. over the past month. South Korea’s financial authorities will sharply raise the bar for investing in the products starting next month, including tripling the minimum deposit requirement to 30 million won ($21,700) from 10 million won ($7,200), to curb speculative money that is adding to stock-market volatility.

According to ETF Check, an ETF data platform operated by Koscom, net inflows into 16 single-stock leveraged and inverse products totaled 7.3364 trillion won ($5.31 billion) between June 16 and July 15. KODEX SK Hynix Single Stock Leverage drew 3.4472 trillion won ($2.49 billion), the biggest inflow among all ETFs in the market.

KODEX Samsung Electronics Single Stock Leverage ranked second with 1.5083 trillion won ($1.09 billion), followed by TIGER SK Hynix Single Stock Leverage with 1.4271 trillion won ($1.03 billion). TIGER Samsung Electronics Single Stock Leverage posted net inflows of 693.8 billion won ($502 million).

Money continued to pour into the products even as Samsung Electronics and SK Hynix shares fell sharply. From June 16 to July 16, SK Hynix dropped 19.49% and Samsung Electronics fell 24.33%. Over the same period, KODEX SK Hynix Single Stock Leverage and KODEX Samsung Electronics Single Stock Leverage, the two funds with the largest net inflows, slumped 45.60% and 48.44%, respectively.

Retail investors appear to have accounted for much of the buying. Individuals were net buyers of 4.2386 trillion won ($3.07 billion) across seven SK Hynix single-stock leveraged products over the past month, and 1.6119 trillion won ($1.17 billion) across seven Samsung Electronics single-stock leveraged products. Foreign investors were also net buyers, purchasing 859.5 billion won ($622 million) and 724.2 billion won ($525 million), respectively, though far less than individuals. Institutions were net sellers by 5.1713 trillion won ($3.75 billion) and 2.2671 trillion won ($1.64 billion), respectively.

As criticism mounted that retail money was crowding into single-stock leveraged products and amplifying market swings, the Financial Services Commission announced measures on July 16 to tighten investment requirements. Starting Aug. 5, the minimum deposit required to invest in single-stock leveraged products will rise to 30 million won ($21,700) from 10 million won ($7,200). Regulators will also ban the current practice in which brokerages typically relax the deposit requirement after about three months based on an investor’s trading experience.

The tighter deposit requirement is expected to reduce demand. Regulators project the combined market capitalization of single-stock leveraged products, now about 12 trillion won ($8.69 billion), will shrink to about one-third of that level, or 4 trillion won to 5 trillion won ($2.90 billion to $3.62 billion). The trading unit will also be increased to 20 shares, with the change set to take effect in November. Based on the July 16 closing price of 15,000 won ($10.90) a share for a single-stock leveraged ETF, investors would need at least 300,000 won ($217) to buy 20 shares. That is more than the 255,000 won ($185) price of one Samsung Electronics share.

The mandatory training time for investing in single-stock leveraged products will be extended to three hours from two hours. New listings of the products will be suspended until the market stabilizes. Advertising and marketing for products already trading will also be banned.

Delisting leveraged ETFs was excluded from the discussion. The FSC said delistings apply when a product’s market capitalization shrinks or when it no longer functions as intended. The current problem with single-stock leveraged ETFs is excess demand and an overheated market, it said, so delisting criteria do not apply. FSC Chairman Lee Eok-won also dismissed calls to delist the products during a YouTube appearance, saying such a move could create bigger side effects in the market.

The FSC also rejected a proposal to lower the leverage ratio to 1.5 times, saying that would run counter to the system’s original purpose. Byeon Je-ho, director-general of the FSC’s Capital Markets Bureau, told a briefing on July 16 that lowering the leverage ratio on products already listed would require a meeting of beneficiaries. He added that the procedure is even more difficult than a shareholder meeting, which is why the option was not included.

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com