Since their listing in late May, single-stock leveraged exchange-traded funds (ETFs) designed to deliver twice the daily return of Samsung Electronics and SK Hynix have suffered double-digit declines for two consecutive days, emerging as a key flashpoint in South Korea’s financial markets. As some politicians call for delisting, financial authorities have begun working on regulatory safeguards to protect investors and stabilize the market.

Lee Chan-jin, Governor of South Korea’s Financial Supervisory Service (FSS), recently remarked that he “should have blocked them even if it meant lying down in protest,” while also scheduling an emergency meeting with asset management company CEOs. However, actually pulling the delisting trigger is proving difficult, as authorities grapple with the potential supply-demand shock to the market and the legal complexities surrounding investor property rights.

All 14 Products Collapse Below Listing Price — Nearly Halved in a Month

According to data from the Korea Exchange and Koscom CHECK on July 9, all 14 single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix listed on South Korea’s stock market closed below 20,000 won (approximately $13.25) — the same level as their initial public offering price in late May. The seven Samsung Electronics leveraged products traded between 14,600 won (approximately $9.67) and 16,100 won (approximately $10.67), while the seven SK Hynix leveraged products ranged from 15,900 won (approximately $10.53) to 19,600 won (approximately $12.98).

On July 8 alone, all 14 products posted declines of around 11%. This followed a 12-13% plunge the previous day, marking two consecutive sessions of double-digit losses. Even the ‘KODEX SK Hynix Single-Stock Leveraged’ ETF — the sole product that had held above the 20,000-won threshold until the prior session — finally succumbed, closing down 11.27% at 19,635 won (approximately $13.01), failing to defend its listing price.

Returns have nosedived this month. The ‘KIWOOM SK Hynix Futures Single-Stock Leveraged’ ETF recorded a return of -43.53% from July 1 to 8, the worst among all ETFs. The ‘1Q SK Hynix Futures Single-Stock Leveraged’ ETF followed closely at -43.49%, while the remaining SK Hynix leveraged products all entered the 42-43% loss range. Investors who bought in at the end of June have essentially seen their principal nearly cut in half.

The situation for Samsung Electronics leveraged products is no different. ‘TIGER Samsung Electronics Single-Stock Leveraged’ (14,850 won), ‘ACE Samsung Electronics Single-Stock Leveraged’ (14,805 won), ‘RISE Samsung Electronics Single-Stock Leveraged’ (14,900 won), and ‘KIWOOM Samsung Electronics Futures Single-Stock Leveraged’ (14,615 won) have all fallen as much as 27% from their listing prices, sinking into the 14,000-won range.

Online communities are flooded with desperate posts from investors: “My return is -50%,” “My 70 million won (approximately $46,374) investment has been cut in half,” and “Even if it recovers to the previous high, it’s going to be nearly impossible to break even.”

Market Swells to approximately $9.9 Billion — Individual Investors Account for 92%

The severity of the problem lies in the fact that these products have grown beyond mere speculative instruments to a scale that could shake the entire market. As of July 6, the total net assets of single-stock leveraged and leveraged inverse ETFs stood at approximately 14.91 trillion won (approximately $9.9 billion). While this represents a 15.3% decline from the peak of 17.6 trillion won (approximately $11.7 billion) on June 25, it still hovers near the 15-trillion-won mark.

In particular, the net assets of the ‘KODEX SK Hynix Leveraged ETF’ alone are estimated at roughly 5 trillion won (approximately $3.3 billion). Its trading value also accounts for about one-third of South Korea’s entire ETF market, raising concerns that it could distort overall market liquidity.

An even greater concern is the composition of investors. As of the end of last month, individual investors held a staggering 92% of the total product size. This means retail investors are shouldering the full risk of these leveraged products. In fact, from July 1 to 8, individual investors net purchased 563.8 billion won (approximately $373.5 million) of ‘KODEX Samsung Electronics Single-Stock Leveraged’ and 208.6 billion won (approximately $138.2 million) of ‘TIGER Samsung Electronics Single-Stock Leveraged.’ Net buying inflows of 1.11 trillion won (approximately $734.8 million) and 469.3 billion won (approximately $310.9 million) also poured into ‘KODEX SK Hynix Single-Stock Leveraged’ and ‘TIGER SK Hynix Single-Stock Leveraged,’ respectively. Even as share prices plummet, investors continue to “average down” their positions.

Politicians Call for Delisting vs. Practical Hurdles

As losses mount, politicians have begun directly raising the possibility of delisting these single-stock leveraged ETFs. Ahn Cheol-soo, a lawmaker from the ruling People Power Party, wrote on Facebook on July 6: “The ‘Samsung-SK Hynix’ leveraged products are a complete policy failure. They are eroding corporate value and citizens’ wealth by trillions of won each day,” adding that “strong corrective measures, including delisting, are needed to normalize the stock market.” People Power Party leader Chang Dong-hyeok also argued that the government had “effectively created a ‘KOSPI casino,'” raising the need for an audit into how these products were introduced.

However, delisting is far from straightforward in practice. While Korea Exchange regulations do contain a provision allowing delisting when deemed necessary for public interest and investor protection, forcibly liquidating legally listed financial products would inevitably spark legal disputes over the violation of investor property rights.

The liquidation process itself could also deliver a massive shock to the market. Unlike regular stocks, when ETFs are delisted, investors receive cash settlements based on net asset value (NAV). With single-stock ETFs currently totaling around 15 trillion won (approximately $9.9 billion), and considering that Samsung Electronics’ average daily trading value this month is roughly 9 trillion won (approximately $6.0 billion) and SK Hynix’s is around 14 trillion won (approximately $9.3 billion), the liquidation would inevitably unleash a flood of sell orders. Moreover, not only the physical shares held by the ETFs but also their single-stock futures positions would need to be unwound simultaneously. If arbitrage trading occurs as asset managers liquidate both spot and futures positions at the same time, the supply-demand shock could be amplified further. Paradoxically, delisting could end up undermining the very market stability it aims to protect.

A securities industry insider noted, “With Samsung Electronics and SK Hynix already experiencing high volatility, the single-stock leveraged products have essentially poured gasoline on the fire,” but added, “Given the large number of investors involved, delisting is realistically not going to be easy.”

Volatility Drag and Negative Compounding — The Structural Loss Mechanism

The risks of single-stock leveraged ETFs extend beyond simple share price declines. The “negative compounding effect” and “volatility drag” that financial authorities have consistently warned about are now materializing.

For example, if an underlying asset falls 20% and then rises 20%, a regular product (1x) goes from 100 to 80, then to 96 — a 4% loss. But a leveraged product (2x) goes from 100 to 60, then to 84 — a 16% loss. The more the market fluctuates between gains and losses, the more assets shrink exponentially.

Lee Sang-hyun, an analyst at Meritz Securities, explained: “When the underlying asset moves in one direction, high returns can be expected from leveraged ETFs, but as the amplitude of fluctuations increases, volatility drag occurs. In times of high volatility like now, investors should be mindful of the potential value erosion from holding leveraged ETFs over the long term.”

Kim Seok-hwan, an analyst at Mirae Asset Securities, also noted: “The total net assets of single-stock leveraged products have shrunk by nearly 3 trillion won (approximately $2.0 billion) from their peak, recording net losses. While net inflows for the largest products by net assets — KODEX and TIGER — are gradually increasing, valuation losses of approximately 400 billion won (approximately $265.0 million) for Samsung Electronics and roughly 600 billion won (approximately $397.5 million) for SK Hynix have occurred.”

Amplifying Market Volatility — “Structural Rebalancing Triggers Additional Swings”

The core of the controversy extends beyond individual investor losses to the amplification of overall market volatility. The Korea Capital Market Institute stated in a recent report that “volatility in Samsung Electronics and SK Hynix has increased since the launch of single-stock ETFs,” and analyzed that “structurally, rebalancing trades can further expand volatility.”

Leveraged ETFs execute large-scale rebalancing trades near the market close each day to maintain their target leverage ratio. The structure dictates additional buying on days when the stock rises and additional selling on days when it falls. This process creates a concentration of supply and demand for specific stocks, which in turn fuels a vicious cycle of heightened price volatility.

Authorities Shift Focus to Tightening Entry Barriers

Financial authorities appear to be leaning toward tightening entry regulations rather than pursuing delisting. FSS Governor Lee Chan-jin is scheduled to meet with asset management CEOs on July 13 to discuss improvement measures. At the third Consumer Risk Response Council meeting held on July 6, authorities expressed concern that “if household financial assets become excessively concentrated in specific asset classes or if investments are made using leverage beyond tolerable levels, not only are investors exposed to high loss risks, but household financial soundness could be seriously damaged.”

Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance Koo Yun-cheol also acknowledged at a National Assembly committee meeting on July 7: “We are well aware of concerns that leverage is contributing significantly to stock market volatility,” adding that “we are discussing how to address these issues.” Koo further stated: “We have required investor education and established certain guidelines, but given the various concerns being raised at this point, we are discussing what measures can stabilize the situation.”

In the market, measures such as raising basic deposit requirements, strengthening investor education, increasing fees, and restricting additional product launches are being discussed as likely options. Originally introduced with the aim of retaining investment funds that were flowing overseas within South Korea’s domestic stock market, these products have now seen retail investor losses snowball, deepening the authorities’ dilemma.

With FSS Governor Lee Chan-jin effectively acknowledging a policy failure by stating he “should have blocked them even if it meant lying down in protest,” attention is now focused on whether the government and financial authorities can move past criticism of their belated response and deliver effective measures to restore market confidence.