Why South Korean investors must rethink their high-risk bet on Tesla-linked leveraged products

South Korean investors, known for their bold approach to high-risk trading, are now facing the consequences of their speculative bets on Tesla-linked leveraged products. As Tesla Inc.’s stock has plummeted, so too have the fortunes of many retail investors in South Korea, who placed their bets on exchange-traded products (ETPs) designed to amplify gains.

Tesla, which had become a beloved stock among South Korean investors, has seen its value decrease significantly in recent months. This has affected thousands of retail investors who were banking on ETPs that mirror Tesla’s daily price movements—particularly the Leverage Shares 3x Tesla product.

According to data from South Korea’s top three brokerages, as of February 21, Korean investors owned a significant share of this product, which seeks to triple Tesla’s daily returns. That strategy, however, has not paid off, as the leveraged product is down over 80% from its high in December, while Tesla stock itself has “only” dropped by 41% in that time.

Leveraged ETPs — designed to maximize gains by utilizing derivatives and rebalance daily — frequently incur deadly losses when the market moves against them. These products at times will lag their underlying assets during volatile periods.

That’s precisely what we’re seeing right now, with Tesla-linked products and other high-risk assets such as Bitcoin and Chinese market-linked structured notes also plunging sharply.

Korean investors reel from heavy losses in risky leveraged ETPs

The huge losses among Korean investors highlight their appetite for high-risk trading that, at times, has alarmed regulators and brokers. In response to the big losses in some of the riskiest leveraged ETPs listed overseas, Mirae Asset Securities Co., one of South Korea’s largest brokerages, said it would suspend orders for such ETPs last week.

Another leveraged exchange-traded fund, listed in the U.S. and offering twice the daily return on Tesla shares, has lost nearly 70% of its value since peaking on Dec. 17. According to depository data, Korean investors owned about $1.5 billion of the fund on Wednesday, or 43% of its total assets.

Leveraged ETPs have become all the rage worldwide, issued in huge numbers by Wall Street firms after post-U.S. election market euphoria. But after a recent pullback in the so-called “Magnificent Seven” stocks — over the summer, stocks like Nvidia, Microsoft, Apple, Amazon and Alphabet surged on a wave of economic uncertainty and competition from Chinese tech companies — many of these speculative products are souring.

South Korean retail investors, who make up a large share of the trading volume in these kinds of instruments, are feeling the pinch amid this downturn. Many have already suffered painful losses on speculative assets, including Bitcoin and structured notes linked to the Chinese market. Tesla has been particularly popular with South Korean investors since the onset of the pandemic.

As of February 21, local traders held approximately 358 billion won ($245 million) in the London-listed Leverage Shares 3x Tesla product. This represented over 90% of the fund’s assets that day.

Tesla mania persists in Korea despite heavy losses in leveraged ETPs

Some experts believe that despite this downturn, the appetite for leveraging Tesla-specific products remains strong. “Tesla has always been one of the most favourable stocks among Korean investors, and this craze has also naturally led to the purchase of leveraged Tesla products such as TSL3,” said Bora Kim, APAC head of strategy of ETP provider Leverage Shares. He also said the extreme volatility of Tesla shares makes them appealing to short-term traders.

Tesla-linked ETPs are not alone in struggling, as leveraged ETFs across the board have had a tough time. The T-REX 2X Long MSTR Daily Target ETF (MSTU), an exchange-traded fund that offers investors leveraged exposure to the stock of Strategy (formerly MicroStrategy), is also down about 81% since its November peak, according to The Kobeissi Letter. In just three trading days, it was down 40%—the same devastating trend plaguing funds tied to Tesla.

Leveraged ETFs are always riskier, and in volatile periods, they do worse than plain old ETFs because of the costs associated with daily rebalancing and the use of derivatives instead of the underlying stocks. In a study by GSR Markets, leveraged ETFs often lag similar strategies in volatile markets by more than 20%.

South Korean traders face reckoning as Tesla’s decline tests high-stakes bets

With pressure on Tesla’s stock, South Korean retail investors may have to re-evaluate their highly leveraged trading habits.

The maker of electric vehicles is in choppier waters, facing headwinds that include increased competition, patchy demand, and macroeconomic pressures.  With regulators taking more precautionary steps and brokerages pulling back on risky products, South Korean investors may need to reassess their approach. Will they double down on their aggressive bets on Tesla and other leveraged assets, or will they seek safer, more conservative investments moving forward?

If the slide continues, more Korean investors may be staring at steep losses, adding to wider concern about speculative trading in the country. With regulatory scrutiny mounting and brokers taking preventative measures, it will be interesting to see if South Korean investors will continue their all-out assault on leveraged bets on Tesla or temper their approach for more conservative investments.

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