South Korea’s Watchdog Warns on Single-Stock Leveraged ETFs as Turnover Tops 120%

Average daily turnover exceeds 120%

Four times that of standard leveraged and inverse ETFs

Some products recorded drawdowns of as much as 38%

South Korea’s Financial Supervisory Service has issued a public warning to investors in single-stock leveraged exchange-traded funds.

The regulator said June 18 it was issuing a “consumer alert caution” after prices of single-stock leveraged and inverse products showed sharp swings over a short period. The Financial Supervisory Service can issue public consumer alerts and tighten oversight of products whose investment risks have increased.

Between June 2 and June 8, the maximum loss from the peak for SK Hynix single-stock leveraged products reached 38%, according to the agency. That was about double SK Hynix shares’ maximum decline of 19.1% over the same period.

Excessive short-term trading was also cited as a concern. Average daily turnover in single-stock leveraged products reached 122.5% from May 27 to June 12, versus 30.2% for domestic equity leveraged and inverse ETFs. That means the products changed hands more than once a day on average.

The watchdog also warned that the gap between a product’s market price and its underlying value could widen. The message was seen as referring to a recent case in which the premium or discount on the ACE SK Hynix Single Stock Leverage ETF widened sharply.

Sim Woo-il, Korea Economic Daily reporter, goodwill@hankyung.com