Regulator warns as South Korean investors pile into leveraged ETFs

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South Korea’s financial regulator has raised concerns that retail investors are cramming more into risky leveraged overseas exchange-traded funds as they seek profits on volatile markets.

The Financial Supervisory Service said investors had been lured overseas AND F which are designed to offer three times the daily returns of the underlying index.

The Korea Stock Exchange prohibits triple-leveraged and triple-leveraged inverse ETFs.

By trade value, foreign-listed and leveraged triple-reverse exchange-traded products accounted for nearly 80% of the top 50 ETPs in which South Korean retail investors invested between January and March of this year, according to the FSS.

This article was previously posted by Ignite Asiaa security held by the FT group.

According to the Korea Securities Depository, three of the ten overseas products that saw the most net purchases from South Korean investors in the first half of the year were highly leveraged ETPs, compared to just one. over the whole of last year.

The three ETPs are the ProShares UltraPro QQQ, a triple leveraged ETF which tracks the Nasdaq 100 index, the Direxion Daily Semiconductor Bull 3X Shares ETF which tracks the Philadelphia Semiconductor index and the MicroSectors FANG & Innovation 3X Leveraged ETN which tracks the SOLFANGT index. .

Net purchases of ProShares UltraPro QQQ by South Korean retail investors totaled around $2.1 billion in the first half of this year, more than double the $760 million last year, according to data. data. The fund’s market price fell about 60% in the year to August 19.

Direxion Daily Semiconductor Bull 3X Shares ETF garnered $1.3 billion in net purchases even as its price fell around 70%.

MicroSectors FANG & Innovation 3X Leveraged ETN attracted $250 million in net buys as it also fell around 80%.

“Stock prices are going through a period of adjustment, but investors are still looking for opportunities that offer high returns as they experienced during the Covid-19 pandemic,” said Hwang Seiwoon, senior researcher in Seoul, Korea. Capital Market Institute.

South Koreans had opened 4.9 million international business accounts by the end of last year, a sharp increase from the 2.4 million accounts registered in 2020 and 800,000 in 2019, the FSS said.

Investors in their 20s and 30s, who opened 2.2 million new accounts, were responsible for almost half of new accounts opened last year, the FSS said.

The FSS attributed the increase in the number of investors in this age group to their familiarity with finding information and their tendency to be risky traders.

In the first three months of last year, young investors were the main driver of the 522.7 billion won ($413 million) of new funds that flowed into 42 ESG funds listed in South Korea, totaling 1.63 billion won, as most of the country was locked up in her home, according to Korean data provider FnGuide.

KCMI’s Hwang said young investors, many of whom started investing after the pandemic, seem to be overconfident in their investment decisions.

“In the case of leveraged ETFs, there are risk factors such as high price volatility and compound interest,” according to the FSS statement.

“Leverage products may experience greater price volatility in overseas stock markets, where there is no limit to price changes.”

*Ignites Asia is an information service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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Robert D. Coleman