South Korea’s First 2x Leveraged ETFs to List Tomorrow: Linked to Samsung, SK Hynix, Daily Volatility ±60%

TradingKey - South Korea's first 2x leveraged ETFs linked to Samsung Electronics and SK Hynix will be listed on May 27. Since individual South Korean stocks are subject to a ±30% price limit, the theoretical daily volatility range of these products could reach ±60%. Regulators and analysts warn that the negative compounding effect and daily rebalancing mechanism may cause investors to suffer losses far exceeding expectations and exacerbate market volatility.

First Batch of Single-Stock Leveraged ETFs to Launch Tomorrow; Samsung Electronics Up Over 140% YTD

Reportedly, this batch of products was issued by eight asset management companies, including Samsung, Mirae Asset, Korea Investment, and KB. There are 18 products in total, including 16 ETFs (14 long-leveraged and 2 inverse) and 2 long-leveraged ETNs. The inverse products can provide 2x short returns.

These are the first leveraged ETFs approved since South Korea revised its Capital Markets Act on April 28. The new regulations allow for single-stock underlying assets, raising the individual stock holding limit from 30% to 100% and removing the requirement to hold at least 10 stocks. Currently, only Samsung Electronics and SK Hynix meet the entry thresholds: a market capitalization share of no less than 10% and an average daily trading volume share of no less than 5% over the past three months.

These two leading underlying stocks have performed particularly well amid this year's AI wave. As of May 25, Samsung Electronics and SK Hynix have recorded year-to-date gains of 144% and 199%, respectively. In a report on May 15, Nomura Securities raised the target prices for the two companies to 590,000 KRW and 4,000,000 KRW, respectively.

The initial total scale of Samsung Asset Management's two KODEX leveraged products reached approximately 2.4 trillion KRW, setting a record for the largest launch-day volume for leveraged products in South Korean history. Each ETF was listed at 20,000 KRW, significantly lower than the share prices of approximately 300,000 KRW for Samsung Electronics and 2,000,000 KRW for SK Hynix.

The management fee for KODEX products under Samsung Asset Management is 0.29%, compared to 0.7%-1.0% for similar products in Hong Kong, while the average for South Korean products is about 0.2 percentage points higher. Samsung Asset Management utilizes a physical delivery design, which is expected to reduce annual transaction costs by more than 1%.

Retail Demand and Regulation: Influx of 14 Million Retail Investors; Strict Investment Thresholds Imposed

South Korea has over 14 million retail investors, and financial regulators approved these products with the aim of repatriating domestic capital that has been flowing into similar offshore offerings.

Year-to-date, Hong Kong-listed Samsung 2x leveraged ETFs have attracted approximately $1.3 billion in inflows, while CSOP Asset Management's related products have reached $1.65 billion in assets under management; the SK Hynix-linked product is currently the world's largest single-stock leveraged product. Mirae Asset Securities expects net inflows into domestic ETFs to reach as high as 5.3 trillion won.

Regulators require investors to maintain a 10 million won initial margin and complete a mandatory two-hour investor education course. As of May 25, more than 140,000 South Koreans have registered for the training. Kim Do-hyung, head of the ETF advisory division at Samsung Asset Management, stated: "Both returns and losses on single-stock leveraged products can be doubled, making them high-risk financial instruments."

Beware of Negative Compounding and Rebalancing; Regulators Warn "Short-Term Speculation Only"

However, substantial risks lurk behind high returns. The "negative compounding effect" of leveraged ETFs is particularly pronounced in volatile markets. South Korea’s Financial Supervisory Service (FSS) pointed out that if the underlying asset experiences repeated ups and downs, the cumulative returns of the leveraged structure will underperform the underlying asset.

An official from the FSS warned: "Inexperienced investors may blindly enter the market based on brand trust in 'Samsung Electronics,' potentially incurring losses that exceed expectations." The FSS has explicitly stated that such products are intended only for short-term trading and are detrimental to long-term investors.

The combined market capitalization of Samsung Electronics and SK Hynix now accounts for more than 47% of the KOSPI, meaning a single piece of news can trigger sharp index swings. Furthermore, the daily rebalancing mechanism of leveraged ETFs may amplify overall market volatility during periods of turbulence.

According to a UBS trading desk report, on March 3, the day SK Hynix plummeted more than 10%, rebalancing-related volume accounted for 60% of the stock's total trading volume in the final hour before the close. During the May 15 sell-off, Barclays estimated that approximately 17% of the daily volume for SK Hynix and about 10% for Samsung Electronics originated from rebalancing operations.

Jung In Yun, CEO of Singapore-based Fibonacci Asset Management, stated that these ETFs will exacerbate existing concentration risks, ensuring that index volatility remains elevated. South Korean regulators also cautioned that supply-demand imbalances or liquidity shortages could cause the ETFs to trade at a premium or discount to their net asset value.