Single-stock leverage ETFs shed over 80% in a month, wiping out retail investors

Single-stock leveraged ETFs have plunged more than 80% over the past month, piling losses on investors. With another drop of more than 20% on Wednesday, analysts say those who bought into these products a month ago have in effect lost nearly all of their principal.

According to ETF Check, the TIGER SK hynix Single-Stock Leverage ETF posted a one-month return of -81.99% as of Wednesday. The KODEX SK hynix Single-Stock Leverage ETF was similarly down 81.88%. Since both products track the same underlying asset, all SK hynix single-stock leverage ETFs have fallen more than 80%.

Samsung Electronics leverage ETFs have fared little better. The TIGER Samsung Electronics Single-Stock Leverage ETF lost 69.73% over the same period, while the KODEX Samsung Electronics Single-Stock Leverage ETF fell 69.70%.

The slide has continued in recent sessions. As the Kospi tumbled sharply on Wednesday, the TIGER SK hynix Single-Stock Leverage ETF was down 23.34% from the previous session as of 2:30 p.m., according to Koscom Check, deepening losses further.

Leveraged ETFs are designed to deliver roughly twice the daily return of their underlying asset, amplifying gains in a rising market but rapidly compounding losses in a downturn. Analysts say the risk has now materialized in full: in a highly volatile market like the current one, losses can far exceed those of the underlying asset itself.

Citigroup Global Markets also said domestic retail investor losses have ballooned to extreme levels. Mohamed Apabhai, head of Asia-Pacific trading strategy at Citigroup Global Markets, said in a report to institutional investors that the market capitalization of leveraged ETFs based on Korean assets had plunged from $52.5 billion on June 22 to around $19 billion recently.

Taking into account the $33.5 billion decline in market capitalization from the peak, as well as an additional $6.2 billion in fresh inflows since then, Apabhai estimated that cumulative losses for domestic retail investors total approximately 56.3 trillion won ($38.4 billion).

By underlying asset, SK hynix leverage ETFs saw the largest drop in market capitalization, falling $17 billion. KOSPI 200 leverage products followed with a decline of $10.5 billion, while Samsung Electronics leverage ETFs shed more than $5 billion.

Apabhai said losses tied to leveraged ETFs could widen further. "There is a possibility that leveraged ETF market capitalization could fall below $8 billion before year-end," he said.

Financial regulators said they are treating the sharp volatility in single-stock leveraged ETFs as a serious matter and are moving to draw up additional measures.

Financial Services Commission Chairman Lee Eok-won, speaking at a National Assembly Political Affairs Committee briefing on Wednesday, said he views the sharp expansion of market volatility with great gravity. "As the person ultimately responsible for financial markets, I feel the weight of that responsibility deeply, and I will swiftly pursue remedial measures — and take bold additional steps if necessary," he said.

Lee said the FSC would review a range of corrective options, including raising the minimum deposit requirement, adjusting the leverage ratio for single-stock leveraged products, and restricting new purchases to professional investors.

"Raising the cash deposit requirement to 30 million won ($20,490) would significantly reduce market participation and trading volume," he said, adding that the FSC would also consider raising the deposit threshold further if market conditions warrant.

Lee said regulators are also reviewing the introduction of a variable leverage structure that would reduce the leverage ratio during periods of heightened volatility, along with aggregate position limits, staggered rebalancing schedules and measures to reduce trading volume.

Financial Supervisory Service Governor Lee Chan-jin also said the agency is taking the single-stock leverage issue seriously. "We will do our utmost to protect investors and minimize market volatility," he said.