Lee Chan-jin, Governor of South Korea’s Financial Supervisory Service (FSS), has revealed deep concerns over the market volatility and potential retail investor losses triggered by single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix. However, he remained tight-lipped on specific institutional remedies, signaling a cautious approach.
Governor Lee held a meeting with the chief executive officers of 20 asset management firms at the Korea Financial Investment Association in Seoul’s Yeouido district on July 13, publicly urging the industry to engage in self-corrective efforts regarding the overheated ETF market. In particular, he issued a strong warning against false and exaggerated advertising, taking direct aim at the recent controversy over the inclusion of SpaceX IPO shares.
“Since investors primarily rely on asset manager advertisements when selecting ETFs, false or exaggerated advertising is a very serious issue from an investor protection standpoint,” he stated. “Extraordinary self-corrective efforts are necessary.” He added, “It is very disappointing that such cases have occurred frequently at large asset managers that should be setting an example for the industry.”
His public remarks were interpreted as a direct response to the situation involving Korea Investment Management’s ‘ACE U.S. Space Tech Active’ ETF. The firm had promoted the product by claiming it could include SpaceX shares at the IPO price during the company’s public offering. However, the plan fell through when Mirae Asset Securities, which participated in the underwriting syndicate, failed to receive a single share in the final allocation.
Governor Lee also urged firms to “ensure thorough management of tracking errors in cooperation with liquidity provider (LP) securities firms when operating ETFs.” Tracking error refers to the difference between an ETF’s net asset value (NAV)—its actual worth—and its market trading price. This remark is seen as addressing the price distortion issues that have come to the fore since the launch of single-stock leveraged products. Indeed, the ‘ACE SK Hynix Single Stock Leverage’ ETF recorded an extreme tracking error approaching 50% last month when its bid price surged just before market close, even as the underlying SK Hynix stock fell nearly 8%.
The meeting was originally convened to share the results of an inspection into asset managers’ voting and shareholder rights exercise systems. However, during the closed-door session, the issue of Samsung Electronics and SK Hynix single-stock leveraged ETFs—which has emerged as the biggest issue in South Korea’s capital markets—was intensively discussed. “Governor Lee repeatedly emphasized that leveraged ETFs have increased stock market volatility,” one attendee said. “However, specific improvement measures were not discussed.”
Another attendee noted, “In a situation where it is difficult to arbitrarily block products that meet established requirements, the FSS also appears to be deeply deliberating the effectiveness of countermeasures.” As the KOSPI index fell below the 6,900 level on the same day, with all 14 single-stock leveraged ETFs hitting record lows since their listing, attendees voiced consecutive concerns that retail investor losses could worsen further in a declining market.
One asset management CEO said, “There was a rationale for introducing these products since similar ones exist overseas, but domestic investors are utilizing them far more aggressively than expected. In a downturn like the current one, the issue of retail investor losses could become more serious.”
Market attention is now focused on what supplementary measures financial authorities will unveil. The financial investment industry and academia anticipate that authorities will opt for significantly raising entry barriers rather than extreme measures like delisting.
The most realistic alternative is considered to be an increase in the base deposit requirement. Currently, to invest in single-stock leveraged ETFs, an investor must deposit a base amount of at least 10 million won (approximately $6,685) and complete online pre-education. Financial authorities are reportedly reviewing a plan to significantly raise this base deposit to between 30 million won (approximately $20,055) and as high as 50 million won (approximately $33,425). This references the precedent set during the overheating of high-risk equity-linked warrant (ELW) derivatives between 2010 and 2012, when authorities stabilized the market by introducing a 15 million won (approximately $10,028) base deposit and mandating investor education.
Alongside this, customized limits per investor are also being discussed as an alternative. This approach would restrict new purchases if the proportion of ultra-high-risk products, such as single-stock leveraged ETFs, exceeds a certain level within an investor’s total financial assets. The intent is to comprehensively consider an investor’s total asset size and risk exposure by product, rather than simply checking whether a certain amount is deposited in an account.
Authorities are also reviewing plans to drastically increase mandatory pre-education from the current two hours (one hour general, one hour advanced) to up to 30 hours, and to make simulated trading and a test-passing procedure mandatory. The need to transition to a system that periodically re-educates investors on the product’s loss structure, negative compounding effects, and tracking error risks has also been raised.
Options to adjust the leverage multiple or limit the size of the ETFs themselves are also being mentioned. These include lowering the rebalancing benchmark from the current 2x to 1.5x, or setting a cap on the total net asset value (AUM) of single-stock leveraged ETFs to restrict new listings.
Lee Jun-seo, president of the Korean Securities Association and a business administration professor at Dongguk University, said, “When the ELW market became speculative, the government announced measures that effectively shut the market down. Raising entry barriers and lowering market interest in this way is a realistic direction.”
Financial authorities remain cautious. The Financial Services Commission is scheduled to meet with securities firm and asset manager officials on July 14 to further discuss measures, and has been communicating with the industry through various channels, from high-level to working-level staff, since last month. A financial authority official said, “We are looking at all available options. We aim to review their validity and feasibility and announce supplementary measures soon.”
Meanwhile, regarding the official agenda of the meeting—the exercise of voting rights by asset managers—it was pointed out that qualitative aspects remain insufficient despite quantitative growth. The voting rights exercise rate for public and private equity funds rose from 79.6% in 2024 to 91.6% last year and 91.8% this year, while the opposition rate also increased from 5.2% to 6.8% and 8.2% over the same period. However, it was revealed that 121 out of 285 asset managers (42.4%) inspected this year cited perfunctory reasons for their voting decisions, such as ‘minimal impact on the shareholders’ meeting’ or ‘no infringement of shareholder rights.’ Governor Lee criticized this as “copy-and-paste disclosure” and ordered the establishment of substantive internal control systems.