[Gangnam Perspective] The Bright Side and Dark Side of a 2x Bet on Samsung Electronics and SK Hynix

A single-stock leveraged exchange-traded fund (ETF) will debut on the 22nd of next month. Strictly speaking, it is not a fund. With no diversification and a bet on just one stock at twice the leverage, it is highly speculative. For that reason, the financial authorities did not allow the product name to include "ETF." Investors must deposit 10 million won in margin and complete training as well. The government rushed to open the door despite these strict conditions in order to bring back investment funds that had gone overseas, partly to help stabilize the exchange rate. The move is aimed at the large sums of money domestic investors have poured into leveraged products tied to Samsung Electronics and SK Hynix, both of which are already listed in Hong Kong.
There is, however, debate over the rationale behind the launch. If a domestic investor buys a leveraged ETF linked to Samsung Electronics in Hong Kong and the stock rises, dollars must be converted into won so that the fund can buy Samsung Electronics shares in the Korean market to keep the return at twice the local gain. That means dollars flow into Korea and help defend the won.
Of course, a falling stock price and a double inverse leveraged ETF create the opposite effect. But given Samsung Electronics' current uptrend and the fact that net buying in the leveraged ETF far exceeds that of the double inverse product, it is more realistic to see the fund as contributing to won stability. Setting that aside, the product is understandable to some extent as part of efforts to diversify the market and advance the stock market. Compared with high-interest margin lending, leveraged ETFs have lower costs, no holding-period limit, and no forced liquidation because they are purchased with investors' own capital. In that sense, they broaden the range of choices available depending on an investor's style.
At this point, a question naturally arises: "If the outlook for semiconductor stocks is bright, couldn't I just invest long term in a Samsung Electronics leveraged ETF?" The answer is no. A leveraged ETF is not a long-term investment product. Unless the market moves in one direction for a long time, it contains a negative compounding effect, also known as volatility drag, that erodes assets over time. For example, if Samsung Electronics rises 10% from 1 million won to 1.1 million won and then falls 10% the next day, it does not return to 1 million won. It falls to 990,000 won, a 1% loss.
In the same scenario, a leveraged ETF would rise 20%, or twice the 10% gain, to 1.2 million won, and then fall 20%, or twice the -10% loss, the next day to 960,000 won. The loss expands from 2% to 4%. The higher and more repeated the volatility, the faster the assets shrink. That is because a leveraged ETF is designed to deliver twice the daily return, not twice the return over a week or a month. Moreover, because an ETF holding only one stock is even more volatile, recovering principal may not be easy even if the price remains trapped in a range for a period of time. The United States Securities and Exchange Commission (SEC) also banned new listings of ETFs with leverage above 3x after October 2020 for the same reason.
There is also concern that the product could run directly counter to Government policy, which is focused on expanding long-term investment, including consideration of a Long-Term Holding Incentive Program for Minority Shareholders, because its high-risk nature inevitably attracts short-term traders chasing quick profits. The impact on market volatility cannot be ignored either. According to foreign media reports, when SK Hynix plunged 16% in a single day on the 3rd of last month, as much as 60% of the volume traded in the final hour before the close consisted of leveraged ETF rebalancing orders. To keep the daily return precisely at twice the underlying move, mechanical sell orders flooded in before the close, deepening the decline. With Samsung Electronics and SK Hynix now accounting for more than 40% of market capitalization so far this month, the domestic market could swing sharply even from daily rebalancing alone as more money flows into the ETF.
Overall, expectations are high, but concerns are just as significant, and the challenge is to dispel them. One option would be to gradually raise the barriers to entry, similar to a contract for difference (CFD) transaction, by requiring a maintained average balance at month-end over a certain period. A single-stock leveraged ETF can be an aggressive betting tool when conviction is strong, but if approached on a vague hunch, it becomes a double-edged sword. The stronger the light of desire, the deeper the shadow of risk. Adjusting that balance is entirely up to the investor.
winwin@fnnews.com Reporter