The first single-stock 2x leverage ETF to debut on the domestic 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 in terms of returns or even logged losses. Analysts said the "negative compounding effect" that occurs in volatile markets due to the product structure, which tracks twice the daily return, tripped up investors.
According to the Korea Exchange (KRX) and the asset management industry on Jul. 3, over the past month from May 29 to Jun. 30, 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 stock's gains. While Samsung Electronics gained 11.5% over the month, Samsung Asset Management's "KODEX Samsung Electronics Single-Stock Leverage" returned just 0.53%. Mirae Asset Global Investments' "TIGER Samsung Electronics Single-Stock Leverage" (0.40%) and Korea Investment Management's "ACE Samsung Electronics Single-Stock Leverage" (0.04%) also failed to properly reflect the underlying stock's rise.
By contrast, over the same period Hanwha Asset Management's "PLUS Samsung Electronics Single-Stock Leverage" fell 0.72%, and Hana Asset Management's "1Q Samsung Electronics Futures Single-Stock Leverage" dropped 0.55%. KB Asset Management's "RISE Samsung Electronics Single-Stock Leverage" also recorded a negative return of 0.07%.
Despite the underlying Samsung Electronics surging with a double-digit gain over the month, individuals who invested in 2x leverage ended up taking losses or effectively failing to make returns.
The situation was no different for the SK hynix leverage product lineup. Even though SK hynix's share price jumped 15.77% in the same period, leveraged ETFs tracking it failed to keep up with the underlying stock's rise. Even the best-performing "KODEX SK hynix Single-Stock Leverage" capped out at a 15.42% return.
In particular, Hana Asset Management's "1Q SK hynix Futures Single-Stock Leverage," which uses futures as its underlying asset, managed to rise only 6.91%, falling short of even half the underlying stock's gain.
The reason single-stock leveraged ETFs fail to track the underlying stock's returns lies in the product's structural limitations. 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 stock returns to its original price. But a leveraged ETF that tracks twice the daily return climbs 20% on the first day and then falls about 18.2% the next day, failing to recover principal and ending up with a loss. The more such ups and downs repeat, the more the long-term return inevitably gets whittled away.
An official at a domestic asset management firm said, "In a market where share prices do not rise in a straight line but repeat ups and downs, the negative compounding effect can occur during the daily rebalancing process based on the closing price, damaging asset value."
In fact, in Jun., Samsung Electronics moved sideways while repeatedly spiking and dipping in the short term, whereas SK hynix maintained a relatively continuous uptrend from mid-month. For SK hynix, where volatility was lower and direction more defined, the damage to returns from compounding was relatively small, narrowing the return gap with the underlying stock.
The industry views single-stock leveraged ETFs as useful investment tools in periods with clear short-term direction, such as around earnings or key events, but not suitable for long-term investing.
An official at a domestic asset management firm said, "When the underlying asset moves explosively by 10% in a day, 2x leverage has to move by 20% a day, so the greater the volatility, the much greater the downside pressure (the amount shaved off) becomes," adding, "No matter how meticulously managers run the products, in today's unusually volatile markets where the underlying stock surges or plunges more than 10% in a single day, there are limits to fully offsetting the daily compounding erosion."
The official said, "Intraday volatility has been increasing this month as well, so the return gap between the underlying stock and leveraged products is likely to widen for the time being," advising, "If you approach it with the simple idea that 'the underlying rose 10% over a month, so leverage must have risen 20%,' you can easily get burned, and you must understand the negative compounding effect before investing."