"There will be criticism, but I hope people stop investing even now." Bae Jae-gyu, head of Korea Investment Management, who pioneered Korea's exchange-traded fund (ETF) market, issued a strong investment warning about single-stock leveraged and inverse products.
It is unusual for the CEO of the asset management firm running the products to personally urge restraint in investing. Bae is called the "father of ETFs" in Korea's financial investment industry.
On the 20th, Bae posted on his Facebook a piece titled "Performance analysis of 2x leveraged inverse products for individual stocks," urging investors to refrain from single-stock leveraged and inverse products.
Bae said, "As the head of a firm that runs single-stock leveraged ETFs, I am sorry to say this," adding, "In short, do not invest in single-stock leveraged and 2x inverse ETFs."
The core problem Bae pointed to is the structural limits of leveraged and inverse ETFs that track double the daily return.
He explained that to hit the target multiple on a daily basis, the portfolio is rebalanced every day, and as the underlying asset's volatility grows, losses can compound.
He noted, "Even if, over time, the underlying (the base asset) returns to its original level, the ETF price may not come back," adding, "In particular, when the underlying's volatility is as large as it is now, the structure accumulates daily losses."
The analysis Bae released showed the same phenomenon. SK hynix(000660) shares fell 17.9%, from 2,243,000 won on May 27 to 1,842,000 won on July 16. Over the same period, the SK hynix single-stock leveraged ETF plunged 47.5%.
A simple calculation based on the underlying asset's decline would put the leveraged product's loss at about 35.8%, but the actual loss was 11.7 percentage points larger.
Conversely, the 2x inverse product that bets on a fall in SK hynix also delivered results that differed from expectations. In theory, it should have produced a 35.8% return, double the share price drop, but the actual performance was a 31.1% loss. The gap between theoretical and actual returns was 66.9 percentage points.
Bae emphasized, "Individual stocks are far more volatile than indexes," adding, "In a market where volatility is widening, holding leveraged and inverse products for the long term can work against investors."
Korea Investment Management currently runs the single-stock leveraged products "ACE Samsung Electronics Single-Stock Leverage" and "ACE SK hynix Single-Stock Leverage." Bae's latest remarks are drawing attention in the market as a direct warning about products under management.