Single-stock leverage ETFs need structural redesign, not just higher deposit requirements, experts say

Single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix have been singled out as a key driver of stock market volatility just a month and a half after their launch, prompting the government to move toward countermeasures. Options under discussion range from the drastic step of delisting to raising investor entry barriers through stricter education requirements and higher mandatory deposits — but voices in the industry are also calling for more fundamental fixes, such as adjusting leverage multipliers or expanding the range of eligible stocks.

However, some push back against framing single-stock leverage products as the primary culprit, arguing that global equity markets are already experiencing broad semiconductor-driven volatility and that heavy-handed regulation would be misguided.

Lee Jun-seo, a professor at Dongguk University's business school, said Monday that single-stock leveraged ETFs are "not the main offender, but an accessory." He said the core cause of Kospi volatility is the global market turbulence triggered by fears of a semiconductor "peak-out" — a decline after reaching a peak. Still, he said the emergence of single-stock leverage products tied to two stocks that together account for more than half of the Kospi's market capitalization has poured fuel on that volatility, and the accessory role is far from trivial.

"The only countries that allow single-stock leveraged ETFs are the United States, Hong Kong and South Korea," Lee said. "Hong Kong is a financial hub with an environment built for diverse products, so it's an exception — the US is the direct comparison."

He added that the US has about 400 single-stock leveraged ETFs covering roughly 100 companies, with total assets under management of around 50 trillion won ($33.2 billion), while South Korea has reached 16 trillion won in AUM with just two companies and 16 products. "That's a scale that simply doesn't make sense," he said.

"Because fund flows are concentrated in two stocks with an outsized market weighting, volatility in the broader market has grown," Lee said. "In particular, the rebalancing that occurs when liquidity providers set up and redeem ETFs has amplified that volatility further."

He was skeptical of tightening tracking-error controls, a measure being discussed in the market. He said, "Tracking-error controls would actually increase volatility further. When LPs rebalance to keep the tracking error in check, that rebalancing itself becomes additional supply and demand, making volatility worse." His argument is that loosening tracking-error requirements would naturally sort stronger operators from weaker ones, allowing the market to consolidate around larger asset managers capable of stable fund management.

Lee suggested introducing a separate volatility interruption mechanism specifically for single-stock leveraged products as an alternative. "It would be worth considering a rule that halts trading in single-stock leveraged products when their trading value exceeds a certain percentage of the underlying stock's trading value," he said.

Reducing the current 2x leverage multiplier to 1.5x is also being floated. One securities industry official said that if the goal is to lower the risk inherent in single-stock leveraged products, cutting the multiplier from 2x to 1.5x is worth considering. "Since 1.5x exchange-traded notes are already listed on the market, it should be technically feasible," the official said.

However, there are concerns that such a move would undermine the original rationale for introducing single-stock leveraged products. The government launched them partly to keep capital from flowing overseas, and a lower multiplier would reduce their appeal, analysts say.

Some argue that leverage itself is not the problem. KOSPI 200 leveraged ETFs have traded domestically for more than 16 years without ever sparking the kind of market-wide volatility debate seen now. One asset management industry official said trading leveraged products is unavoidable for a market aiming to reach advanced status, so treating leverage itself as the problem is inconsistent. "If the market had opened up from the outset to the top 20 or 30 stocks by market capitalization — including Hyundai Motor, Naver and major financial stocks — capital would have been spread out and the concentration we're seeing now would have been far less severe," the official said.

A senior executive at another asset management firm took a different view, saying that running single-stock leveraged products requires a well-functioning individual stock futures market, which is not the case for most other companies. Simply allowing more stocks for the sake of diversification would create a different set of problems, the executive said. "A more realistic alternative would be allowing Samsung Electronics and SK Hynix to be mixed into a single product rather than keeping them separate, along with stronger accountability for LPs and tighter management oversight by fund operators," the executive said.

The measures most widely expected to come first are raising the mandatory deposit requirement and strengthening investor education. The current 10 million won threshold would be raised to 50 million won to lift the entry bar, alongside more rigorous risk education for the products. While these are the easiest steps to implement, critics say they amount to little more than a stopgap.

"It would have some short-term effect in reducing trading volume by keeping small investors out," one brokerage official said, "but given that existing investors are already heavily involved, it is questionable whether it would actually help ease volatility."

Delisting is also not straightforward in practice. The Korea Exchange's KOSPI listing rules specify grounds for ETF delisting as falling below minimum net asset thresholds, failure to track the underlying index, absence of a liquidity provider, and termination of the investment trust — meaning delisting solely on the grounds of high market volatility would be difficult. There is a catch-all provision allowing delisting "when the exchange deems it necessary for the public interest and investor protection," but no precedent has been confirmed of an ETF being delisted on that basis.

Lee said the situation presents a paradox: with underlying share prices falling and AUM already shrinking, delisting in the name of investor protection would actually increase investor losses. "It might be worth considering if AUM climbs back above its initial level, but even then, delisting while a product is on an upward trend would not be easy," he said.

One official at a large asset management firm said many aggressive investors are high-net-worth individuals. "If the products are delisted, they won't simply stop investing in leveraged products — they'll move their money overseas, which would actually add to market disruption," the official said.