Korean investors' buying of U.S. single-stock leveraged products shrank sharply right after the regulations were tightened.
Single-stock leveraged products, which had ranked among the top net buys by Korean retail investors trading U.S. stocks every month this year, fell out of the top 50 this month. The shift reflects financial authorities' move at the end of last month to raise the minimum deposit requirement for domestic and overseas single-stock leveraged products to 30 million won from 10 million won.
According to Korea Securities Depository (KSD) on the 11th, single-stock leveraged products that made the top 50 net buys in U.S. stocks every month from January to July this year did not appear at all in the tally for Aug. 1–7. Even in the first half, buying of these products was solid. In January, four products that track Tesla, Palantir and Coinbase ranked near the top, rising to eight in February and seven in March. There were six in April and three in May, a slight decrease, but they still stayed within the top 50.
In June, investment enthusiasm returned. A total of 12 single-stock leveraged products tracking SpaceX, Rocket Lab and Broadcom made the top 50 net buys, marking a peak for the year. In July, seven products also ranked near the top.
But the mood shifted after the regulations took effect at the end of last month. In the Aug. 1–7 top 50 net buys, single-stock leveraged products disappeared. It should be noted that the August tally covers only one week and preferences can change with shifts in market leaders or individual stock price trends.
Even so, the fact that related products were pushed out of the rankings immediately after the regulations took effect is seen as a notable change in flows. The market views the higher minimum deposit for domestic and overseas single-stock leveraged products—from 10 million won to 30 million won—as the key factor raising the entry barrier for individual investors.
Lee Hyo-seop, a senior research fellow at the Capital Market Research Institute, said, "There was concern that if only the rules on single-stock leverage for SK hynix and Samsung Electronics were tightened domestically, a balloon effect could occur, with investors shifting to overseas single-stock leveraged products," adding, "Given this, it can be seen that the same standards were applied to both domestic and overseas products."
Leveraged products are structured to track the daily return of an underlying asset by a set multiple. As volatility rises, long-term returns can diverge from a simple multiple of the underlying asset. In particular, if the underlying asset's price repeatedly rises and falls, losses can accumulate due to the negative compounding effect.
The problem is position adjustments by existing investors. Even if an investor running a loss tries to adjust a position by averaging down through additional purchases or by selling holdings and reentering, additional buying is restricted if the 30 million won requirement is not met. While selling existing holdings is allowed, the new deposit standard applies to additional buying or reentry, which could limit investors' options.
Online investor communities are voicing frustration that "blocking additional purchases by existing holders does not align with the purpose of investor protection." Experts said tougher regulations on single-stock leveraged products themselves are necessary to protect individual investors and prevent greater market volatility. However, they noted that the impact on existing investors needs to be reviewed separately.
Lee said, "Overseas leveraged ETFs carry high investment risk because revenue and losses move more than the underlying asset, and there were concerns about whether individual investors had fully recognized these risks," adding, "Going forward, rather than applying rules only to certain products, there needs to be consistent investor protection standards across similar high-risk leveraged products."