Korea’s Single-Stock Leveraged ETFs Risk Following ELWs Into Decline

More curbs may follow, including leverage-ratio changes

South Korean authorities are rolling out fresh measures almost daily to cool overheating in single-stock leveraged exchange-traded funds. Market participants say the latest curbs announced on July 29 raise the chances that the products will follow the path of equity-linked warrants, or ELWs, which were devastated by past regulatory action.

What has drawn the most attention is regulators’ statement that they may refer to Hong Kong’s “variable leverage” rules, according to the financial investment industry on July 30. Hong Kong’s regulators plan to allow leverage ratios on single-stock leveraged products to be adjusted to as low as 1.5 times depending on market conditions starting next month.

The industry views that as a sign regulators have found a way to change leverage ratios. Until now, market participants have argued that leverage on single-stock products should be cut from two times to about 1.5 times. Many had considered that difficult to implement because each asset manager would need approval through a beneficiary meeting. “There is a high chance financial authorities will revise the system so variable leverage is exempt from beneficiary meetings,” a capital-markets official said.

A separate rule limiting each retail investor’s holdings of single-stock leveraged ETFs to no more than 20% of total invested assets is also being viewed as a powerful restriction. “Trading value in ELWs also fell to about one-tenth of its previous level,” another capital-markets official said. “Single-stock leveraged products appear to be following a similar course.”

Shim Woo-il, Hankyung.com reporter goodwill@hankyung.com