[Editorial] Leveraged ETFs Have Become a 'High-Speed Trading Playground'; Fundamental Reform Is Needed

A sweeping overhaul is unavoidable for the Samsung Electronics and SK hynix single-stock leveraged exchange-traded funds (ETFs) that have turned the Korean stock market into a 'high-speed trading playground.' Less than a month after their launch, the side effects were so severe that the head of the financial authorities later said he regretted that he should have stopped them even if it meant lying down in front of them. As market distortion and investor losses have already gone beyond what can be tolerated, any further delay in response could leave scars that will be difficult to reverse.
The average daily turnover ratio of the 16 single-stock leveraged ETFs launched on May 27 reached nearly 120% as of the previous day. For some products, the daily turnover ratio at one point exceeded 2,400%. That meant the holdings changed hands more than 24 times in a single day. As ultra-short-term trading aimed at profiting from semiconductor stock volatility surged, a vicious cycle emerged: 'higher volatility → more leveraged trading → even greater volatility.' Trading value in these products accounted for 40% of the entire market, further distorting prices.
Concerns have been raised both at home and abroad. Global investment banks such as Goldman Sachs and JPMorgan Chase pointed out that concentration in a small number of semiconductor stocks and excessive leveraged investing increased market fragility and amplified the decline in share prices. Foreign media also compared the extreme volatility in the Korean stock market to 'Squid Game' or a 'casino.' Since the launch of the single-stock leveraged ETFs, the KOSPI sidecar mechanism has been triggered 19 times and the circuit breaker mechanism five times. Compared with the average annual number of activations since 2002, this is highly unusual.
Investor losses are also mounting. Most leveraged ETF returns have been cut in half from their peaks. On the 13th, when the KOSPI plunged by nearly 9%, an unusual situation occurred in which all investors in the SK hynix leveraged ETF fell into the red. Investors have even filed a petition with the National Assembly Public Petition with Citizen Consent System calling for the products to be delisted. Experts say the damage worsened because the so-called negative compounding effect, in which losses are magnified when the underlying asset falls, was compounded by mechanical rebalancing that further deepened the decline.
Financial authorities and related agencies have begun preparing corrective measures, but they have yet to present a decisive solution. As market anxiety continued to grow, President Lee Jae-myung eventually ordered a direct response. The Ministry of Economy and Finance, the Financial Services Commission (FSC), the Financial Supervisory Service, and the Bank of Korea held a macroeconomic and financial issues meeting on the 16th and are now moving belatedly to finalize supplementary measures.
Single-stock leveraged ETFs were introduced with the aim of drawing domestic demand for similar overseas products into the local market. But if they have instead worsened market distortion and investor harm, policymakers must acknowledge the failure and use every available tool to restore normal market conditions. There is growing criticism that the government's proposed fix of raising the base deposit requirement from 10 million won to 30 million won in cash is not enough. Broader options, including converting the products into offerings for professional investors only or lowering the leverage ratio, should also be considered. A fundamental overhaul of the system is urgently needed to restore investor trust and stabilize the market.