"Five times of buying the dip, account still halved"... Leveraged ETF becomes a "meat grinder" for Korean retail investors, some urge "national compensation"

The South Korean single-stock leveraged ETF market is experiencing a retail investor crisis. Amidst severe market volatility, a large number of individual investors have become increasingly trapped in their repeated attempts to average down their positions, with unrealized losses in accounts commonly exceeding 50%. The root cause of this crisis lies in the hastily launched policy products by financial authorities two months ago, aimed at stemming capital outflows.

On July 28, circuit breakers were triggered on South Korea’s two major stock exchanges on the same day, causing market sentiment to deteriorate sharply. The Korea Composite Stock Price Index (KOSPI) fell below 6,000 points for the first time in more than three months. Against this backdrop, the combined monthly trading volume of "KODEX SK Hynix Single Stock Leveraged" and "SOL SK Hynix Futures Single Stock Inverse 2X" has already exceeded 139 trillion KRW, surpassing the total trading volume of the KOSDAQ market during the same period (113 trillion KRW) by over 26 trillion KRW. On the same day, the Korean Financial Services Commission announced that if market demand does not cool, it would consider further raising the investment threshold or setting personal investment caps.

The immediate victims of this turmoil are tens of thousands of ordinary retail investors. On July 16, the Korean Financial Services Commission raised the basic margin requirement for related products from 10 million KRW to 30 million KRW, yet trading enthusiasm persisted—on the day of the announcement, single-stock leveraged products accounted for 36.6% of all ETF trading volume, and subsequently remained between 37% and 43%. As criticism mounts, some argue that there was a severe dereliction of duty in regulatory approval, and calls have emerged to initiate national compensation proceedings.

Cases of severe retail investor losses are flooding online forums.

Kim, a 45-year-old office worker, started with 7 million KRW, investing in SK Hynix and Samsung Electronics single-stock leveraged ETFs. Each time the stock price dropped, he averaged down with the belief that "lowering the average cost helps recover losses on a rebound," making five additional purchases in total. His total investment ballooned to 34 million KRW, but current unrealized losses have exceeded 50%. "I kept buying more positions to break even, but just got deeper and deeper. Now I can neither sell nor add more," he said.

Choi, a 25-year-old university student, had a similar experience. He used 8 million KRW saved from part-time jobs to enter the market, and after semiconductor shares fell, he borrowed a living expense loan to buy more single-stock leveraged ETFs. In the end, only about half his principal remained. "Losses grew much faster — and more brutally — than gains," he said.

On the anonymous workplace forum "Blind," a bank employee posted that his investment portfolio, which started at 20 billion KRW, had once grown to 7 billion KRW, but shrank to just 2.2 billion KRW within a month after focusing positions on Samsung Electronics, SK Hynix spot shares, and single-stock leveraged ETFs. Yeo Kyung-ok, a Chinese cuisine chef who once won a live trading contest with a 750% return, also publicly shared his SK Hynix leveraged ETF account — his 120 million KRW principal is now worth only 46 million KRW, an unrealized loss of 74 million KRW and a drawdown of 61.38%.

The product mechanism of leveraged ETFs is the core reason for persistent losses.

These products track twice the daily return of their underlying assets. If the underlying asset rises unilaterally, returns are amplified; but in a volatile, alternating up-and-down environment, the "negative compounding" effect leads to continuously accumulating losses—even if the underlying asset eventually returns to its original value, leveraged ETFs often fail to recover their losses.

Bae Jae-kyu, CEO of Korea Investment Management, recently warned publicly: "If the underlying stock remains as volatile as it is now, leveraged ETFs will continue to accumulate losses daily. Even if the underlying eventually returns to its original price, the ETF price is unlikely to recover." He directly advised investors, "Even now, you should not invest in single-stock leveraged ETFs."

From an industry perspective, the tendency of retail investors to focus on single themes is also a structural weakness that magnifies losses. The "RISE Donghak Ant" ETF, tracking Korea retail buy signals, has risen only about 13% this year, compared with a 58% gain for the RISE KOSPI ETF in the same period; the "KODEX US Seohak Ant" ETF, tracking overseas retail portfolios, has fallen 2.7% this year while the KODEX US S&P500 ETF has risen 11.2%. Park Seung-jin, ETF analyst at Hana Securities, pointed out that individual investors have a higher risk appetite and prefer to select stocks based on momentum and trend, which can result in significant drawdowns when market trends reverse.

The policy background of this crisis is also highly contested.

The above-mentioned single-stock leveraged ETFs were launched on May 27, with the official aim of easing high exchange rate pressures, stemming capital outflows, and stimulating the domestic stock market. However, huge sums of money quickly flowed into certain leveraged stock products after launch, and mechanical rebalancing before the close each day amplified the fluctuations of the underlying stock price, leading to market concerns about the "short gamma" effect. According to reports, the net asset value of the relevant products reached 16 trillion KRW at the end of June, and single-day trading volume once reached 14 trillion KRW.

In response to these issues, Financial Supervisory Service chief Lee Chan-jin previously stated, "Now I regret it. We should have done everything possible to block the approval (of the securities registration statement) at the time." This remark has been interpreted as a de facto acknowledgment of regulatory oversight failure.

Critics argue that authorities proceeded hastily without adequately assessing market impact and risk control mechanisms, resulting in severe asset losses for many retail investors; some have explicitly called for a national compensation accountability mechanism for regulatory failure, and urged the National Assembly’s Political Affairs Committee to hold inquiries and investigate who was responsible during the product approval process. Kim Eun-hye, a People Power Party lawmaker, said that they are currently gathering broad opinions from affected investors and hope the situation will improve soon.

The financial authorities have made it clear that regulatory tightening will continue, but the specifics are still undecided.

On July 27, the ruling Democratic Party K-Capital Market Special Committee held a closed-door meeting with securities and asset management firms, deciding to first observe the actual effects of raising the basic margin to 30 million KRW before deciding whether to implement new measures. The committee stated that for now, there are no plans to force delisting or reduce leverage ratios, but they reserve the option to act further depending on market conditions.

On July 28, Financial Services Commission Chairman Lee Eok-won met with representatives of securities and management companies and made it clear that "if market demand does not sufficiently cool, we will consider further tightening investment conditions or setting personal investment limits," and pledged to continue drafting measures to reduce market volatility and strengthen investor protection.