I didn't know leverage could be this scary. Now I don't even have money to average down, and I can't cut my losses either.
An office worker surnamed Kim, 45, saw an account halved after investing in single-stock leveraged exchange-traded funds (ETFs) for SK hynix and Samsung Electronics. Starting with 7 million won, Kim made five additional purchases whenever the share price fell, thinking, "If I lower the average purchase price, I can recover quickly when it rebounds." The investment eventually swelled to 34 million won, but the current unrealized loss ratio is above 50%. Kim said, "I kept averaging down to recoup losses but ended up in a swamp," adding, "Now I'm in a position where I can neither sell nor buy more."
A college student surnamed Choi, 25, is in a similar situation. Choi started with 8 million won saved from part-time jobs, but as losses grew with the drop in semiconductor stocks, Choi even took out a living-expense loan to buy more single-stock leveraged ETFs. The account eventually shrank to about half of the principal. Choi said, "It was a mistake to touch leveraged products out of impatience to recover quickly," adding, "The speed at which losses grew was much faster and harsher than when revenue accrued."
As market volatility hit a peak recently, individual investors suffering hefty losses are emerging one after another. On this day as well, after sell-sidecars were triggered on both markets, circuit breakers were imposed, rapidly chilling investor sentiment. Some, trying to recoup losses, recklessly made additional buys and worsened the damage, while others, having missed the timing to cut losses, fell into involuntary long-term investing, deepening small investors' sighs.
◇ "Loss proofs" continue on online communities and social media
Similar stories are spreading on online communities and drawing attention. On the anonymous office worker community Blind, a bank employee wrote that an investment that started with 200 million won last year had once grown to 700 million won, but after concentrating on Samsung Electronics and SK hynix common shares and single-stock leveraged ETFs, it fell to about 220 million won in a month. The employee said, "If it hadn't been 2x leverage, the loss would have been much smaller," complaining of severe stress.
A loss case involving Chinese cuisine chef Yeo Kyung-ok, also known for stock investing, drew interest. Yeo recently revealed on social media (SNS) an SK hynix single-stock leveraged ETF investment account. The account, into which about 120 million won had been invested, fell to the 46 million won range, with an unrealized loss of about 74 million won (-61.38%). Yeo is known to have won a live trading competition in the past with a 750% return, making the disclosure of this loss even more of a topic among investors.
◇ Leveraged ETFs traded more than KOSDAQ… even an asset manager CEO said "don't buy"
The overheated investing pattern also shows up in transaction data. According to Koscom ETF CHECK, as of the 27th of this month, the cumulative trading value of two products—"KODEX SK hynix Single-Stock Leverage" and "SOL SK hynix Futures Single-Stock Inverse 2X"—exceeded 139 trillion won. During the same period, that was about 26 trillion won more than the entire KOSDAQ market's trading value (113 trillion won).
In particular, even though the Financial Services Commission announced supplemental measures on the 16th, including raising the minimum margin requirement from 10 million won to 30 million won, the trading fever did not cool easily. On the day of the announcement, single-stock leveraged products accounted for 36.6% of total ETF trading value, and thereafter maintained a high share of 37% to 43%.
A leveraged ETF tracks twice the daily return. If prices move in one direction, revenue can expand, but in a volatile market with repeated ups and downs, losses accumulate due to a "negative compounding" effect. That is why even if the underlying asset returns to its previous level, a leveraged ETF may fail to recover principal.
This is also why Bae Jae-gyu, CEO of Korea Investment Management, recently warned publicly, "Do not invest in single-stock leveraged ETFs, even now." Bae said, "If the volatility of the underlying is as large as it is now, losses accumulate every day," adding, "Even if time passes and the underlying returns to where it was, the ETF price is unlikely to come back to the same level."
◇ Authorities also reviewing additional regulations… "Let's first see the effect of the initial measures"
Political circles and financial authorities are continuing discussions on how far to go in their response. The Democratic Party of Korea's K-Capital Market Special Committee held a closed-door meeting the previous day with securities firms and asset managers and decided to first watch the effect of the supplemental measures released by financial authorities, such as raising the minimum margin requirement to 30 million won, before reviewing additional steps. The plan is not to immediately pursue delisting or reducing leverage multiples, but to discuss further actions while watching market conditions.
The Financial Services Commission also signaled additional supplements that day in a meeting with heads of securities firms and asset managers. Lee Eog-weon, chairman of the Financial Services Commission, said, "If demand does not sufficiently subside, we will review additional measures such as further tightening investment requirements or setting individual investment limits," adding, "We will continue to prepare measures that can ease market volatility and strengthen investor protection."