Amid a sharp increase in leveraged investing during the recent volatile market, the Financial Supervisory Service urged caution, saying that related products can incur large losses in a short period.
According to the Financial Supervisory Service (FSS) on the 18th, the market cap of leveraged and inverse exchange-traded products (ETPs) based on domestic stocks was 21.7 trillion won as of the 10th. That is up 75% (9.3 trillion won) from 12.4 trillion won at the end of last year.
As Korea's stock market rallied at the start of the year, the figure jumped sharply in a short time. This is about 13.5% of the 161.2 trillion won market cap of ETPs based on domestic stocks.
In particular, exchange-traded funds (ETFs) for leveraged and inverse strategies, which are relatively easier to access, accounted for most of the related ETPs at 85.3% (18.5 trillion won). Exchange-traded notes (ETNs) came to 14.7% (3.2 trillion won). By product, leverage totaled 18.6 trillion won and inverse 3.1 trillion won, with leverage products proving more popular.
From the start of the year through the 10th, the average daily trading value of the ETPs was 5.6 trillion won, more than triple last year's 1.6 trillion won. The Financial Supervisory Service (FSS) said, "The share of leverage trading relative to all ETPs based on domestic stocks was 26.8%, a slight increase of 1.1 percentage points from a year earlier, and more than twice its share of market cap (11.5%), indicating very active trading."
New investors also increased sharply. Under current rules, individual investors must complete a mandatory one-hour pre-investment course offered by the Korea Institute of Financial Investment to invest in leveraged and inverse ETPs. About 300,000 people completed the course in January and February this year, surpassing last year's annual total of 205,000. On a monthly average, that is 8.8 times higher than a year earlier.
The Financial Supervisory Service (FSS) said extra caution is needed when investing in high-risk leverage products due to reasons including: ▲ rapid loss amplification in the short term (leverage effect) ▲ the possibility of losses even when the market moves sideways (negative compounding effect) ▲ the trap of tracking error ▲ requirements such as pre-investment education and a minimum deposit of 10 million won.
Leverage products can lose up to 60% in a single day, and if the asset shrinks rapidly, it can become difficult to recover principal. The Financial Supervisory Service (FSS) said, "When losses occur, it is hard to remain calm in investing, raising concerns about a vicious cycle in which investors attempt even riskier bets, such as increasing leverage."
The Financial Supervisory Service (FSS) also emphasized that leveraged and inverse ETPs are not suitable for long-term investing, such as installment investing. Management fees are also relatively higher.
The Financial Supervisory Service (FSS) plans to monitor trends in leverage and inverse ETP investment and supervise securities firms and asset managers to ensure they fully describe related investment disclosures. An FSS official said, "In particular, when investing in these ETPs with borrowing and other means, losses can exceed principal, so invest prudently within the range you can afford to lose."