As regulations on single-stock exchange-traded funds (ETFs) have tightened and trading in related products has plunged, investment demand appears to be shifting to index leveraged ETFs, which fall outside the scope of the rules. In particular, on a day when the KOSDAQ index surged, the trading value of the KOSDAQ150 leveraged product topped 1 trillion won, raising concerns that demand for leveraged investments remains strong and fueling worries about a "balloon effect."
Financial authorities raised the basic deposit requirement applied when investing in single-stock leveraged ETFs and exchange-traded notes (ETNs) from 10 million won to 30 million won starting on the 31st of last month. They also limited eligible deposits to cash only, sharply raising the barrier to entry.
Since the rules took effect, transactions in the single-stock leveraged market have visibly contracted. According to the Korea Exchange (KRX), the trading value of 16 single-stock leveraged ETFs plunged 81.2% in 10 days, from 3.1518 trillion won on July 31, when the regulations began, to 592.3 billion won on the 10th of this month. Over the same period, the combined market capitalization of the 16 fell 42.3%, from 8.7766 trillion won to 5.0626 trillion won, and total net assets shrank 39.1%, from 9.1396 trillion won to 5.5695 trillion won, meaning not only volumes but the size of the products themselves have rapidly contracted.
By individual product, the declines are even more pronounced. Among domestic single-stock leveraged ETFs, the trading value of "KODEX SK hynix Single-Stock Leverage," which had been the most actively traded, fell 85.8%, from 1.2596 trillion won on July 31 to 178.6 billion won on the 10th of this month. "KODEX Samsung Electronics Single-Stock Leverage" also dropped 85.5% over the same period, from 510.9 billion won to 74.1 billion won. The trading value of "TIGER SK hynix Single-Stock Leverage" and "TIGER Samsung Electronics Single-Stock Leverage" likewise decreased 72.2% and 81.9%, respectively.
By contrast, the opposite trend emerged in index leveraged products. "KODEX KOSDAQ150 Leverage," which tracks twice the KOSDAQ150 index's daily return, saw transactions rise sharply in step with the recent KOSDAQ rally.
On the 10th, as the KOSDAQ index jumped 6.97% from the previous trading day, the product's trading value came to 1.1104 trillion won, topping the 1 trillion won mark for the first time in about 40 days since July 1.
In the market, some analyze that as restrictions on single-stock leverage have tightened, demand for leveraged investing is shifting to index products, where regulations are relatively looser. That is because while single-stock leverage transactions fell sharply right after the rules, large sums are still flowing into index leveraged products such as those tied to KOSDAQ.
It is also seen as problematic that index leveraged products can amplify market volatility. To track a multiple of a benchmark index's daily return, leveraged ETFs rebalance their portfolios every day, and mechanical trading during sharp market swings can shake underlying supply-demand and volatility. Experts note that risks can grow if short-term investment demand concentrates in leveraged products whose underlying assets are markets like KOSDAQ, where price volatility in individual stocks is relatively high.
However, some say it is prudent to avoid concluding this is simply a balloon effect from regulation. With market volatility itself having expanded sharply—such as the KOSDAQ index jumping nearly 7% in a single day on the 10th—there may also be a significant impact from investors betting on index gains flocking to leveraged products.
Lee Hyo-seop, senior research fellow at the Korea Capital Market Institute, said, "Because the regulations on single-stock leveraged products focus on raising the barrier to entry, demand for leveraged investing itself has not disappeared," adding, "If demand shifts to index leveraged products, where rules are relatively lighter, the market-stabilizing effect intended by the authorities could be limited."
The researcher added, "Unlike large-cap stocks such as Samsung Electronics(005930) or SK hynix, where investment decisions can be made based on earnings and fundamentals, KOSDAQ has no small number of companies with relatively low earnings stability," noting, "If short-term funds concentrate in index leveraged products solely on expectations for specific policies or events, losses and volatility could expand simultaneously the moment expectations break."
The securities industry says authorities should go beyond merely raising the entry barrier for specific products and establish a consistent regulatory framework that can manage risks across leveraged products as a whole.
Kim Doo-eon, a researcher at Hana Securities, said, "If regulations so far have focused on restricting entry, the next step is to normalize excessive short-term turnover costs," adding, "It is worth considering imposing a 0.2% level transaction tax on sales limited to single-stock leverage and inverse ETFs."
He added, "This is intended to return the volatility expense caused by ultra-short-term transactions and mechanical rebalancing back into the product."