"Five Margin Call Top-ups, Account Still Halved"... Leveraged ETFs Become a "Meat Grinder" for Korean Retail Investors, Calls for "State Compensation" Emerge

The South Korean single-stock leveraged ETF market is experiencing a retail investor crisis. Amidst severe stock market fluctuations, a large number of individual investors have become increasingly trapped as they repeatedly attempt to average down their costs, with floating losses on their accounts generally exceeding 50%. The root of this crisis lies in the policy products hastily introduced by financial authorities two months ago to curb capital outflows.

On July 28, South Korea's two major stock markets triggered circuit breakers on the same day, causing market sentiment to deteriorate sharply. The Korea Composite Stock Price Index (KOSPI) fell below the 6,000-point mark for the first time in over three months. Against this backdrop, the cumulative trading volume of two products, "KODEX SK Hynix Single-Stock Leveraged" and "SOL SK Hynix Futures Single-Stock Inverse 2X," exceeded 139 trillion won this month, surpassing the total market turnover of the Korea Securities Dealers Automated Quotations (KOSDAQ) during the same period (113 trillion won) by more than 26 trillion won. The Financial Services Commission announced on the same day that if market demand does not cool down, it will study further raising investment thresholds or setting individual investment caps.

The direct victims of this turmoil are tens of thousands of ordinary retail investors. The Financial Services Commission had already raised the basic margin requirement for related products from 10 million won to 30 million won on July 16, but trading enthusiasm remained high—on the day of the announcement, single-stock leveraged products accounted for a staggering 36.6% of total ETF trading volume, subsequently maintaining a range of 37% to 43%. Criticism has also intensified, with some views suggesting serious negligence by authorities in the product approval process, and calls have emerged to initiate state compensation procedures.

Retail Investors Trapped in Margin Call Top-up Trap, Losses Are Staggering

Cases of severe losses among individual investors have emerged densely online.

Kim, a 45-year-old office worker, started with 7 million won, investing in SK Hynix and Samsung Electronics single-stock leveraged ETFs. Every time the stock price fell, he would buy more, citing that "lowering the average cost helps in recovering losses during a rebound." He topped up his position five times in total, with his total investment swelling to 34 million won, but his current floating loss ratio has exceeded 50%. "I kept chasing buys to recover my losses, only to get deeper into the trap. Now I can neither sell nor buy," he said.

The experience of Choi, a 25-year-old university student, is equally typical. He entered the market with 8 million won saved from part-time jobs. After semiconductor stocks declined, he took out a living expense loan to make additional purchases of single-stock leveraged ETFs, leaving his account with only about half of its principal. "The speed at which losses expand is much faster and more cruel than when making profits," he said.

On the anonymous workplace community "Blind," a banking practitioner posted that his investment portfolio, which started at 2 billion won, had once grown to 7 billion won. However, after concentrating holdings in Samsung Electronics and SK Hynix stocks and single-stock leveraged ETFs, it shrank to about 2.2 billion won within a month. Yeo Kyung-ok, a Chinese cuisine chef who once won a live trading competition with a 750% return, also publicly disclosed his SK Hynix leveraged ETF account—his principal of approximately 120 million won is now valued at only 46 million won, with a floating loss of about 74 million won, representing a loss magnitude of 61.38%.

Structural Risks of Leveraged Products Underestimated

The mechanism of leveraged ETFs is the core reason for the continuous expansion of losses.

These products track twice the daily return of the underlying asset. If the underlying asset rises unilaterally, gains are amplified; however, in volatile markets with alternating rises and falls, the "negative compounding" effect leads to accumulated losses—even if the underlying asset eventually returns to its original level, the leveraged ETF often fails to recover its losses.

Bae Jae-kyu, President of Korea Investment Management, recently issued a public warning: "If the underlying stocks remain as volatile as they are now, leveraged ETFs will continue to accumulate losses every day. Even if the underlying stocks return to their original levels in the future, the ETF prices are unlikely to follow suit." He bluntly advised investors, "Even now, do not invest in single-stock leveraged ETFs."

From an industry perspective, the investment pattern of retail investors concentrating on a single theme is also a structural weakness that amplifies losses. The "RISE Donghak Ant" ETF, which tracks domestic retail buying trends, has risen only about 13% year-to-date, while the RISE KOSPI ETF rose about 58% during the same period. The "KODEX US Seohak Ant" ETF, which tracks overseas retail holdings, fell 2.7% year-to-date, while the KODEX US S&P 500 ETF rose 11.2%. Park Seung-jin, an ETF researcher at Hana Securities, pointed out that individual investors have a higher risk appetite and tend to prioritize momentum and trends when selecting stocks, which leads to significant drawdowns when market trends reverse.

Controversy Over Hasty Product Launch, Calls for "State Compensation" Emerge

The policy background of this crisis is also highly controversial.

The aforementioned single-stock leveraged ETFs were launched on May 27, with the official goal of alleviating high exchange rate pressure, curbing capital outflows, and activating the domestic stock market. However, after the products were listed, huge amounts of capital quickly concentrated on specific stock leveraged products. The mechanical rebalancing operations before the daily close amplified the price volatility of the underlying stocks, triggering concerns among market participants about the "Short Gamma" effect. It was reported that the net assets of related products reached 16 trillion won by the end of June, with single-day trading volume hitting 14 trillion won at one point.

Addressing the emerging chaos, Lee Chan-jin, Governor of the Financial Supervisory Service, previously stated, "I regret it now; we should have tried our best to block [the approval of the securities registration statement] at the time." This statement was seen by outsiders as an implicit admission of approval errors by regulators.

Critics argue that authorities rushed forward without fully assessing market impact and risk control mechanisms, causing severe asset losses for many retail investors. Some views have explicitly stated that a state compensation accountability mechanism should be initiated for regulatory negligence, and they have called on the National Assembly's Government Affairs Committee to investigate responsibility in the product approval process through inquiries and investigations. Kim Eun-hye, a lawmaker from the People Power Party, stated that opinions from affected investors are currently being widely collected, hoping for a swift improvement in the situation.

Regulatory Intervention, Future Control Measures Pending

Financial authorities have clearly indicated that controls will be tightened further, but the specific intensity remains under observation.

On July 27, the K-Capital Market Special Committee of the ruling Democratic Party held closed-door meetings with securities firms and asset management companies. They decided to prioritize observing the actual effects of existing measures, such as raising the basic margin requirement to 30 million won, before deciding whether to proceed with additional regulations. The committee stated that forced delisting or reducing leverage multiples are not currently being considered, but retained the option to take further action depending on market conditions.

Lee Eok-won, Chairman of the Financial Services Commission, clearly stated during a meeting with representatives of securities firms and management companies on July 28, "If market demand does not cool down sufficiently, we will consider additional measures such as further raising investment conditions or setting individual investment limits," and promised to continuously formulate plans to help reduce market volatility and strengthen investor protection.