Financial Supervisory Service Governor Lee Chan-jin voiced concern over the single-stock leveraged exchange-traded funds (ETFs) on Samsung Electronics and SK hynix introduced on the 27th, saying they "do little to stabilize the exchange rate while increasing stock market volatility."
At a regular press briefing at the Financial Supervisory Service headquarters on the 22nd, Lee said, "We introduced single-stock leveraged ETFs as a way to redirect demand for leveraged ETFs listed in Hong Kong back to the domestic market, but it appears the expected effect was limited," adding, "On the other hand, the side effects have grown, and we are devising measures to address them."
Earlier, after criticism that capital outflows driven by increased overseas stock investment were heightening exchange rate volatility, the government pursued the introduction of single-stock leveraged ETFs on Samsung Electronics and SK hynix as one way to absorb domestic investors' demand for overseas leveraged products into the domestic market.
Lee assessed that the product tends to amplify market volatility. "We are in the ironic situation where leveraged ETFs are now driving stock market volatility," Lee said, adding, "Since single-stock leveraged ETFs are increasing volatility, we are strengthening trend monitoring and, together with the Korea Exchange (KRX), discussing risk management measures."
He was particularly concerned about potential losses for retail investors. Lee said, "Since many investors are middle class and working class, a sharp price swing could deliver a heavy blow to the household," adding, "We are considering whether separate stabilization measures are needed." According to the Financial Supervisory Service (FSS), 92% of investors in single-stock leveraged ETFs are retail investors.
He added, "Even after some easing, the turnover of leveraged ETFs reaches 130%," noting, "To reach that level of turnover, unless you run automated trading programs, you would have to be tied up in transactions virtually all day." He continued, "I personally question whether a product that can place such an excessive burden on investors' lives is an appropriate financial product."
Lee also pointed out that single-stock leveraged ETFs could be structured to contribute only to brokerages' revenue growth. "In a gambling hall, those who set the table and run it often make more money than the players," he said. "I am concerned this may be a structure where the system operating the market takes the profit while investors fail to earn as much as they expect."
The Financial Supervisory Service (FSS) currently estimates that the securities industry's trading commissions generated in the process of single-stock leveraged ETF transactions amount to between 5 trillion won and 10 trillion won. It said that equals about 40% to 70% of the relevant products' market capitalization.