Leveraged ETF Debacle: Investor Losses Exceed 50 Trillion Won
Losses by South Korean retail investors from the single-stock leveraged ETF (exchange-traded funds designed to deliver twice the daily return of an underlying index) fiasco have reached an estimated 50 trillion won, while activity in the KOSPI market has also shriveled. Citibank estimates the cumulative losses of domestic retail investors from leveraged ETFs at $38.7 billion, or roughly 55 trillion won.
The trouble began with the high won-dollar exchange rate. At the end of last year, when the won-dollar rate climbed past 1,500 won, the outflow of foreign currency driven by retail investors' expanding overseas investments was cited as one of the causes.
The government pushed for the product's introduction, citing the removal of regulatory asymmetry and the return of investment capital to the domestic market, pointing to the sharp rally in Samsung Electronics and SK Hynix shares and the fact that similar products were already listed overseas. The rollout moved quickly. On April 21, a revision to the enforcement decree of the Capital Markets Act passed the State Council, allowing domestic listings, and on May 27, 16 products tracking Samsung Electronics and SK Hynix hit the market.
Trading was concentrated from the start, with first-day turnover exceeding 10 trillion won. As money poured into products offering double the returns of the two stocks—which carry heavy weightings in the KOSPI—the index swung wildly. When both stocks entered a correction amid a semiconductor downturn, the "negative compounding effect" compounded investor losses.
Financial authorities tightened regulations on July 31, raising the basic margin deposit from 10 million won to 30 million won. Average daily turnover last month fell to one-tenth of its pre-regulation level. But investor losses and the slump in KOSPI market activity have yet to recover.
Questions of responsibility are mounting in political circles. Rep. Choi Eun-seok of the People Power Party said in a statement on the 18th that "there are indications that the Korea Financial Investment Association proposed the introduction during discussions with the Financial Services Commission on January 6." He asked, "Why would the KOFIA go out of its way to take the lead in proposing a product with such high risks and uncertainties? Who ordered it to?" He further raised suspicions: "On January 13, then-presidential chief of staff for policy Kim Yong-beom held a closed-door meeting with the heads of brokerages and asset managers," asking, "Wasn't that the prelude to the launch?" Rep. Choi requested former policy chief Kim, as well as Mirae Asset Group Chairman Park Hyeon-joo, Korea Investment Financial Holding Chairman Kim Nam-goo, Korea Investment & Securities CEO Kim Sung-hwan, and Korea Investment Trust Management CEO Bae Jae-kyu, as witnesses for the government audit.
President Lee Jae-myung said at a press conference at the Cheong Wa Dae state guest house that day, "I have not yet grasped the detailed procedures involved in how the decision was made. Someone must have made the decision." Earlier, Financial Supervisory Service Governor Lee Chan-jin said at a regular press briefing in June, "It's true that preparations at the time were rushed," adding, "I personally reflect on and regret whether we should have blocked it even by sitting on our hands." The opposition is calling for a parliamentary investigation to uncover the circumstances of the introduction decision and determine responsibility.
