Market Volatility in South Korea Draws Investors to Leveraged Exchange-Traded Funds

South Korean Retail Investors Pile into High-Risk Leveraged Funds

Record $520 million was injected into the KORU triple-leveraged ETF last week, a record amount, as retail investors in South Korea continue to drive trading in high-risk overseas investments. This trend has raised concerns among local regulators, who are tightening rules for leveraged fund buyers due to the hidden dangers and pressure on the national currency these investments pose.

South Korean retail investors are among the biggest drivers of trading in US-listed leveraged funds globally, often piling into strategies that promise outsize returns. A significant portion of Korean retail overseas ETF holdings are in leveraged or inverse funds, which can amplify market swings. The bet paid off this time, as South Korean stocks recovered on Thursday morning to post their best day in nearly 20 years after a two-day 18% plunge earlier in the week.

KORU, a triple-leveraged ETF, has a high exposure to Korean semiconductor stocks, which have become the hottest trade this year as investors chase chip heavyweights like Samsung Electronics Co. and SK Hynix Inc. Retail investors poured a record $190 million into the $1 billion ETF amid the crash in a single day, with more than 30% of March's total inflow coming from South Korea, according to local depository data.

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The surge in leveraged ETF trading may have amplified swings in the Korean stock market itself, magnifying the plunge in Korean equities earlier this month as investors unwound their heavy leveraged wagers, according to Sean Taylor, chief investment officer at Matthews Asia.

Regulators have been tightening rules for leveraged fund buyers, with the country's financial watchdog asking local brokerages to reinforce warnings on risks of investing in overseas markets and currency volatility. The watchdog has also rolled out mandatory online training for investors looking to put money in leveraged or inverse ETFs listed in foreign markets.

Leveraged products typically reset daily to give new buyers the performance they anticipate, but the longer investors hold them, the less accurately they track their benchmarks. Analysts warn about the danger of investing in these products during times of heightened volatility, likening it to "flipping a coin."

Regulators plan to pull back part of the rules to help bring Korean retail investor money back to the local market, but will likely keep the cap on leverage. Many retail day traders in South Korea, including Park Eun-hye, have put their money in KORU due to its heavy exposure to semiconductors. Another popular leveraged strategy is Direxion's SOXL, which has taken in over $2 billion in March alone.

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