Korean investors' leverage ETF frenzy: Semiconductor 3x fund tops net purchase rankings

Korean investors' appetite for leveraged ETFs is intensifying. Domestic investors now hold roughly 30 percent of the Direxion Daily Semiconductor Bull 3X ETF (SOXL), a fund that tracks three times the daily performance of US semiconductor stocks.

SOXL has evolved from a popular overseas ETF into what is effectively a flagship product for Korean retail investors. Their holdings in the fund have surpassed not only Apple but also leading ETFs tracking the NASDAQ 100 and S&P 500. The trend has raised concerns that investors are increasingly inclined to bet on the direction of a single sector rather than diversifying across markets.

According to the Korea Securities Depository, SOXL holdings by Korean investors stood at approximately $5.91 billion as of Tuesday. Given that SOXL's total market capitalization was around $19.3 billion at the same time, Korean investors account for roughly 30.6 percent of the fund's entire size.

Because an ETF's total size fluctuates daily with market prices, share counts, and creation and redemption activity, the precise ratio varies depending on when it is measured. Still, it is clear that Korean investors hold a substantial share of SOXL traded globally.

What stands out even more is the pace of growth. A Bank of Korea report published in March last year, titled "Overseas Retail Investors: Time for Diversification," found that Korean investors then accounted for 22.2 percent of SOXL's total size — already an unusually high level at the time.

About a year and five months later, that share has climbed to around 30 percent — a rise of nearly 8 percentage points.

The flow of money into SOXL has accelerated sharply of late. Over the one-month period from July 27 to Wednesday, Korean investors net purchased approximately $2.33 billion worth of SOXL, making it by far the top net-purchased overseas stock during that period. That figure is more than five times the roughly $430 million in net purchases of Alphabet, the parent company of Google, which ranked second.

The buying has not been concentrated in just a few days. Whether the measurement window is narrowed to the past week or widened to three months, SOXL remains the top net-purchased stock among Korean investors. For at least the past several months, domestic investors have been aggressively buying the triple-leveraged product whenever semiconductor share prices have wobbled.

The concentration is also visible in holdings rankings. As of Tuesday, Korean investors' SOXL holdings of approximately $5.91 billion ranked fourth among all overseas stocks held domestically.

By comparison, Korean investors held approximately $5.27 billion in the Invesco QQQ Trust (QQQ), a NASDAQ 100 ETF, and roughly $5.23 billion in the Vanguard S&P 500 ETF (VOO). Apple trailed SOXL as well, with holdings of approximately $4.67 billion. Looking solely at Korean investors' overseas stock accounts, more money sits in SOXL than in Apple — the world's largest company by market capitalization — or in ETFs tracking America's benchmark indexes.

Market observers are treating this as a symbolic indicator of just how strong Korean investors' risk appetite has become. More money is parked in a triple-leveraged ETF with a strong short-term directional character than in S&P 500 or NASDAQ 100 ETFs, which are widely regarded as the standard vehicles for long-term, diversified wealth building.

SOXL is not a product that automatically delivers 30 percent returns whenever the semiconductor index rises 10 percent over a given period. Direxion, the fund's manager, states that SOXL's objective is to deliver 300 percent of the index's daily return, before fees and expenses.

In other words, it is not designed to multiply cumulative returns over periods longer than a single day. Direxion explicitly states that over periods longer than one day, SOXL's returns may differ from three times the cumulative return of the underlying index.

Consider a simple example. Suppose both the semiconductor index and SOXL start at 100. If the index falls 10 percent on the first day, it drops to 90. Because SOXL tracks three times the daily return, it theoretically falls about 30 percent, landing at 70.

For the index to recover to 100 the next day, it must rise roughly 11.1 percent from 90 — which it does, returning to 100. SOXL would then rise about 33.3 percent that day. The problem is that its starting point has already fallen to 70. A 33.3 percent gain from 70 brings it only to about 93.3.

Ultimately, the semiconductor index has traced a path of 100 → 90 → 100, fully recovering to where it started. But the SOXL investment has gone 100 → 70 → 93.3, leaving a loss of roughly 6.7 percent. This is what is commonly called the "volatility decay" or "negative compounding effect" of leveraged ETFs.

Direxion does not describe the product as a general long-term investment suitable for all investors. The company states that leveraged ETFs carry greater risk than conventional ETFs, that investors may sustain significant losses or lose nearly all of their principal over a short period, and that the product is intended for investors who understand its daily investment objective and are capable of actively managing their positions in response to market conditions.

"Korean investors have long shown a tendency toward excessive risk-taking compared with those in other countries, but it seems to have intensified recently with the launch of single-stock leveraged products and a volatile market environment compounding each other," one industry official said. "When losses occur in an environment of heightened uncertainty, investors must keep in mind that recovering those losses requires sustained above-average returns over an extended period."