The first single-stock 2x leveraged ETF to debut on Korea's stock market received a report card that fell short of expectations just one month after listing.
Even though the share prices of Samsung Electronics and SK hynix posted double-digit gains, many leveraged ETFs were flat or even posted negative returns. Analysts said the "negative compounding effect" that occurs in volatile markets, given the product structure that tracks twice the daily return, has weighed on investors.
On Jul. 3, according to the Korea Exchange (KRX) and the asset management industry, from May 29 to Jun. 30 over the past month, Samsung Electronics rose 11.52% and SK hynix climbed 15.77%, leading the semiconductor rally.
However, over the same period, the performance of single-stock leveraged ETFs fell well short of the underlying shares' gains. While Samsung Electronics rose 11.5% over the month, Samsung Asset Management's "KODEX Samsung Electronics Single-Stock Leveraged" returned just 0.53%. Mirae Asset Global Investments' "TIGER Samsung Electronics Single-Stock Leveraged" (0.40%) and Korea Investment Management's "ACE Samsung Electronics Single-Stock Leveraged" (0.04%) also failed to properly reflect the rise in the underlying stock.
By contrast, over the same period Hanwha Asset Management's "PLUS Samsung Electronics Single-Stock Leveraged" fell 0.72%, and Hana Asset Management's "1Q Samsung Electronics Futures Single-Stock Leveraged" dropped 0.55%. KB Asset Management's "RISE Samsung Electronics Single-Stock Leveraged" also recorded a negative return of 0.07%.
Even though the underlying Samsung Electronics surged with a double-digit monthly gain, individuals who invested in the 2x leverage ended up taking losses or effectively failed to make returns.
The situation is no different for the SK hynix leveraged products. Despite SK hynix's share price jumping 15.77% over the same period, the leveraged ETFs that track it failed to catch up with the underlying's gain. Even the best-performing "KODEX SK hynix Single-Stock Leveraged" only managed a 15.42% return.
In particular, Hana Asset Management's "1Q SK hynix Futures Single-Stock Leveraged," which uses futures as its underlying asset, rose only 6.91%, falling short of even half of the underlying's gain.
The reason single-stock leveraged ETFs fail to track the underlying's return is the structural limitation of the products. These products are designed to track "twice the daily return," not a return over a set period. As a result, in volatile markets where prices rise and fall repeatedly, the so-called "negative compounding effect (volatility decay)" occurs.
For example, if a share price rises 10% on the first day and then falls about 9.1% the next day, the underlying returns to its original price. But a leveraged ETF that tracks twice the daily return rises 20% on the first day and then falls about 18.2% the next day, failing to recover principal and posting a loss. The more such swings are repeated, the more the long-term return is inevitably eroded.
An official at a domestic asset management company said, "In a market where share prices do not rise in a straight line but fluctuate, a negative compounding effect can occur during the process of rebalancing at the daily closing price, damaging asset value."
In fact, in Jun., Samsung Electronics showed a pattern of sideways moves and short-term spikes and drops, while SK hynix maintained a relatively continuous uptrend after mid-month. For SK hynix, which had lower volatility and a clearer direction, the erosion of returns from compounding was relatively small, resulting in a narrower gap with the underlying's return.
The industry sees single-stock leveraged ETFs as useful investment tools in periods with clear short-term direction such as earnings announcements or major events, but not suitable for long-term investing.
An official at a domestic asset management company said, "When the underlying asset moves explosively by 10% a day, a 2x leverage must move by 20% a day, so the greater the volatility, the much greater the downward pressure (the erosion)." The official added, "No matter how meticulously managers operate, in an unusually volatile market like these days, where the underlying can surge or plunge more than 10% in a day, there is a limit to fully offsetting the errors shaved off by daily compounding."
The official said, "Intraday volatility has been increasing this month as well, so the performance gap between the underlying and leveraged products is likely to widen for the time being," and advised, "If you approach it with the simple idea that 'the underlying rose 10% in a month, so leverage probably rose 20%,' you are likely to be disappointed; you must understand the negative compounding effect before investing."