The Financial Supervisory Service urged caution for investors ahead of the launch of single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix. Because these products track only one stock, investors are directly exposed to individual corporations' risks, and losses can grow if a "negative compounding effect" occurs due to the leveraged structure, it said.
The Financial Supervisory Service on the 25th outlined cautions for investing in single-stock leveraged ETFs and exchange-traded notes (ETNs). With investor interest in leveraged products surging recently, the move is seen as an effort to preemptively alert investors to related risks for protection. According to the Financial Supervisory Service (FSS), about 100,000 investors applied for advanced education related to single-stock leveraged products from Apr. 28 to May 21.
A leveraged ETF is a product that tracks twice the daily return of a specific stock. Single-stock leveraged ETFs and ETNs using Samsung Electronics and SK hynix as underlying assets are set to launch on the 27th. While single-stock leveraged ETFs and ETNs are already actively traded overseas, the absence of such products domestically has sparked controversy over regulatory discrimination.
The Financial Supervisory Service (FSS) first emphasized that single-stock leveraged products are effectively structured to concentrate investment in a specific corporations. Although the product names are ETFs and ETNs, in practice they invest in a single stock, meaning investors can be fully exposed to the stock price volatility risk of that corporations.
It also urged caution regarding the "negative compounding effect," given the leveraged nature of the products. Because leveraged products track twice the daily return of an individual stock, daily price swings can reach as much as 60%. In particular, in periods of high volatility, repeated rises and falls can cause cumulative returns to deteriorate more than the underlying assets due to the negative compounding effect, so they should be used in a limited way for short-term investment purposes, it said.
Lastly, it noted that, given ETF characteristics, a temporary imbalance between supply and demand or a lack of liquidity can create a gap between an ETF's net asset value (NAV) and its market transaction price.
Meanwhile, to protect investors, financial authorities required new investors in single-stock leveraged products to complete a one-hour basic course and a one-hour advanced course in advance. They must also meet the minimum deposit requirement of 10 million won.