These single-stock leveraged exchange-traded funds, which debuted in May and aim to double the daily performance of Samsung Electronics and SK Hynix, hit the market as excitement for Korean stocks was hitting a peak. They have drawn flak for intensifying volatility in the nation's top AI-related equities.
The index dropped as much as 4.5% on Monday after the market reopened following Friday's holiday.
The debate is taking shape against a quickly worsening environment for semiconductor stocks. Global chip shares fell on Friday as investors abandoned crowded momentum trades and evaluated the effects of a fresh AI model from China's Moonshot. That development brought back memories of last year's DeepSeek shock, raising fresh worries about future demand for high-end chips. A public petition calling on the government to step in gathered more than 35,000 signatures.
On July 16, the Financial Services Commission halted new leveraged ETF listings and tightened trading rules. The minimum deposit needed to trade these products was raised from 10 million won to 30 million won, roughly $20,300. Mandatory investor training sessions were also raised.
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"William Bratton, head of cash equity research APAC at BNP Paribas, wrote in a note": "The measures are an immediate response to the current market volatility. But there is also a recognition by the FSC that it needs to adjust the framework to encourage longer-term capital into the market."
President Lee Jae Myung appeared to foreshadow the new measures, telling officials the market was "quite unstable" and calling for swift corrective action. Choi Soung-ah, the secretary for foreign press affairs, responded to Bloomberg by stating that the administration "does not pursue policies aimed at any specific level of the stock market or short-term market movements," and instead seeks to bolster trust in South Korea's capital markets.
The criticism strikes at the heart of Lee's political identity. Gary Tan, who manages portfolios at Allspring Global Investments, commented: "For President Lee himself, the challenge is supporting Korea's AI ambitions while avoiding a retail-driven boom-and-bust cycle."
According to Morgan Stanley analysts, the higher minimum deposit might make it more difficult for retail investors and decrease their participation. However, there is a three-to-four-week delay before the new rules go into effect, and given that flows have stayed unstable in recent weeks, any quick calming effect appears modest.
Marc Jocum, a senior strategist for products and investments at Global X Management Aus Ltd., explained that leveraged ETFs have become popular in Korea mainly because of their ease relative to other high-return choices. Investors prefer the simplicity of ETFs instead of dealing with complicated and risky options directly.
Gary Tan pointed out: "If retail optimism for AI remains strong, investors can access similar leveraged Korea ETFs overseas, beyond the reach of local regulators."
In 2022, the US gave regulatory approval for the debut of single-stock leveraged ETFs, while cautioning that they are complex instruments meant for short-term trading. Numerous firms that had planned to introduce such products later pulled out. London, by contrast, has remained open to single-stock ETFs with higher leverage, and three-times leveraged versions are still traded on the London Stock Exchange. However, regulators there have cautioned companies regarding how such complex products are advertised and sold to individual investors.
The bottom line: South Korea's single-stock leveraged ETFs have faced criticism for magnifying swings in key AI stocks. Regulators responded by stopping new listings and tightening trading rules. For President Lee, the ongoing difficulty is backing Korea's AI goals while steering clear of a retail-fueled boom-and-bust cycle.
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