South Korea's first leveraged ETFs from Samsung and SK Hynix will be listed tomorrow! You Tinghao: Korean stocks are exhibiting phenomena similar to the crypto market.

South Korea's first double leverage ETFs for Samsung and SK Hynix will be listed, attracting over 100k retail investors. Taiwanese well-known financial writer You Tinghao pointed out that high leverage may amplify stock market volatility, causing Korean stocks to exhibit high volatility similar to cryptocurrencies.

South Korea's first Samsung and SK Hynix double leverage ETFs to be listed tomorrow

On May 27, the Korean Exchange will list 16 single-stock double leverage and inverse ETFs, mainly linked to the two largest semiconductor companies by market value in South Korea: Samsung Electronics and SK Hynix.

Eight asset management firms are involved in issuing the Samsung Electronics and SK Hynix leverage ETFs, including Samsung Asset Management, Future Asset Global Investment, KB, and Hanwha Asset Management. The initial offering price per unit is set at 20,000 Korean won (about $13.3).

Why is this product being introduced? Because the South Korean Financial Services Commission (FSC) approved regulatory changes on April 28 this year, with new rules strictly requiring that only companies with a market value exceeding 10% of the benchmark stock qualify. Currently, only Samsung Electronics and SK Hynix meet this criterion.

In the past, due to domestic regulatory restrictions, many funds flowed into Hong Kong to invest in similar individual stock leverage products. After South Korea launched related products, it helped attract capital back into the domestic market.

Image source: Google Finance, South Korea stock market, Samsung stock price surged rapidly over the past year

Over 100k investors are preparing to participate, with South Korean regulators issuing frequent warnings

According to the Chosun Ilbo, South Korean retail investors are very interested in Samsung and SK Hynix leverage ETFs. These individual stock leverage products require a deposit of at least 10 million Korean won and completion of basic and advanced educational courses in advance. As of May 21, more than 100k applicants had registered for the pre-education program, with 93,118 having successfully completed it.

The dividend and capital gains tax rate for non-stock ETFs in South Korea is 15.4%, which is more advantageous compared to overseas-listed ETFs where profits exceeding 2.5 million Korean won are taxed at 22%. Plus, the tax-free allowance for personal savings accounts (ISA) further boosts investor enthusiasm.

Due to the high volatility of these products, FSC issued a warning on May 15 about the potential for significant losses, and on May 25 reminded investors that, considering the South Korean stock market's daily limit of ±30%, in extreme cases, the theoretical daily fluctuation of double leverage products can reach up to 60%.

Kim Doo-nam, Vice President of Samsung Asset Management, and Kim Nam-ki, head of ETF management at Future Asset Global Investment, emphasized that these products track daily returns, and long-term holding may erode profits due to volatility. Even if the underlying asset prices fluctuate within a range or rebound, the ETF's return may fall below expectations.

You Tinghao: Korean stocks exhibit cryptocurrency market phenomena

Taiwanese well-known financial writer and investor You Tinghao posted yesterday that, the upcoming single-stock double leverage ETF in South Korea, directly linked to two major AI memory giants, has elevated local retail investors' speculative enthusiasm for AI into a higher multiple market game.

You Tinghao pointed out that South Korea has over 14 million retail investors, with large amounts of capital already concentrated in AI semiconductor sectors, driving the KOSPI index to surge dramatically over the past year. This rally is almost entirely supported by Samsung and SK Hynix.

Image source: You Tinghao, Taiwanese well-known financial writer and investor, discusses South Korea leverage ETFs to be listed tomorrow

He further analyzed that the real concern in the market is that these leverage ETFs will amplify overall stock market volatility.

Leverage products require daily rebalancing. If stock prices fluctuate violently, ETF issuers are forced to buy or sell large amounts. In the past, SK Hynix experienced a single-day drop of over 10%, with up to 60% of trading volume in the last hour related to rebalancing of leverage ETFs.

You Tinghao believes that with high leverage products entering the market, South Korea's stock market is gradually entering a cycle dominated by capital flows and leverage, with market sentiment beginning to resemble the high volatility seen in cryptocurrency markets.

Further reading:
Trading Korean stocks more attractive than trading coins: South Korea’s cryptocurrency holdings halved, 22% tax policy sparks debate