Lee Says Single-Stock Leveraged ETFs Were Introduced With Inadequate Policy Design

President Lee Jae-myung acknowledged shortcomings in the policy design behind the introduction of single-stock leveraged exchange-traded funds, saying investor protections were insufficient at the time of their launch.

At a press conference at the Blue House state guest house on September 18, Lee said he had yet to determine the detailed decision-making process. Still, he said, the policy appears to have had shortcomings.

Single-stock leveraged ETFs are products that track twice the daily return of individual shares such as Samsung Electronics Co. and SK Hynix Inc. Lee said he had received reports at the time that domestic investors were buying such products in overseas markets including Hong Kong, leading to foreign-currency outflows.

The purpose was to reduce those outflows by introducing the products in Korea because overseas markets were already trading leveraged ETFs tied to Korean companies. Lee said that rationale was valid in principle from the standpoint of stabilizing the foreign-exchange market and promoting domestic investment.

He said, however, that the launch coincided with the tail end of a stock-market rally, amplifying investor losses. Buying concentrated immediately after the debut, but as the market turned lower, more investors suffered losses equal to twice the decline in the underlying assets.

Lee said financial authorities later introduced follow-up measures after the issue was raised and that risk factors have now been largely addressed. Even so, he said criticism is valid that the protections adopted later should have been in place from the product's introduction.

He added that while no one can know whether stock prices will rise or fall, the government must ensure that investors are fully informed of the risks they are taking and that safeguards are in place to protect them. He also signaled he would further examine how single-stock leveraged ETFs were introduced.