TheBankofKorea(BOK)hasjoinedtheregulatorywarningcamp,issuingriskalertsforsingle-stockleveragedETFslinkedtoSamsungElectronicsandSKHynix,statingthattheseproductsmayamplifymarketvolatilityandexacerbatetheexcessiveconcentrationoftheKoreanstockmarketonafewsemiconductorstocks.OnSunday,theBOKstatedinawrittenresponsetooppositionPeoplePowerPartylawmakerParkSung-hoonthattheaforementionedleveragedETFsmaystrengthenone-sidedtradingbehavior,furtheramplifyingmarketvolatilitywheninvestorsrushinorout;**ifstockpricesdropsharply,ETFredemptionsandportfoliorebalancingwillmagnifyretailinvestorlossesandtriggerbroadermarketturmoil.**ThisstatementisnotablystrongerthanthewordingintheBOK'sJune24financialstabilityreport,whichatthetimestillconsideredsuchproductshelpfulforattractingforeigncapitalandcurbingcapitaloutflows.WiththeBOKpubliclyexpressingsimilarconcerns,discussionsamongfinancialregulatorstotighteninvestmentthresholdsforsingle-stockleveragedETFsareexpectedtoaccelerate.RegulatoryWarningsEscalate,StanceClearlyShifts-------------TheBOKpointedoutintheabovewrittenresponsethatastheprofitabilityofthesemiconductorindustryimproves,theconcentrationofthedomesticstockmarketonafewsemiconductorstockscontinuestorise.SamsungElectronicsandSKHynixtogetheraccountforoverhalfoftheKoreanstockmarket'smarketcapandtradingvolume,andtheexistenceofsingle-stockleveragedETFsmayfurtherexacerbatethisconcentrationrisk.Thisstatementstandsinstarkcontrasttothecentralbank'spositionintheJune24financialstabilityreport.Inthatreport,theBOKcitedthegovernment'soriginalintentinintroducingsuchproducts,statingthatsingle-stockleveragedETFs"helpprovidedomesticalternatives,curbcapitaloutflows,andattractforeigncapitalinflowsintoKorea."**Thiswrittenwarning,however,ismuchharsherintone,markingasignificantshiftinthecentralbank'sstance.**ProductScaleExpandsRapidly,SparkingMarketConcerns---------------OnMay27thisyear,SouthKoreanfinancialauthoritiesapprovedthecountry'sfirstbatchofsingle-stockleveragedETFs,allowinglocalbrokeragestolaunch16productslinkedtothetwotechgiantsaspartofthegovernment'seffortstorevitalizethedomesticcapitalmarket.UnliketraditionalleveragedETFstrackingbroadindicesliketheKOSPI200orS&P500,theseproductsprovideinvestorswithleveragedexposuretoindividualstocks,withdailygainsorlossesattwicetheunderlyingstock'smovement.BuoyedbytheAI-relatedchiprally,theseproductsquicklygainedpopularityamonginvestors.InJunealone,thetotaltradingvolumeof14leveragedETFsreached212trillionwon(approximately$138.6billion),accountingfor26.6%ofthetotalETFtradingvolumeduringtheperiod.**ShenwanHongyuanSecuritiespointedoutthatsinceMay,capitalinflowsintoKorea's2xlongETFshavesurgeddramatically,farexceedingthoseofothermultiple-leverageETFsandordinarymarketETFs.**Historicalpatternsserveasawarning:duringthemarketpeaksandsubsequentdeclinesin2017and2021,leveragedETFscalesactuallyrosecounter-cyclically,showingahighsimilaritytothecurrenttrend.Tomaintaintheirtargetleverageratios,suchETFstypicallybuywhenstockpricesriseandsellwhentheyfall.Thismechanisminherentlypossessesapro-cyclicalnature,potentiallyamplifyingmarketpricevolatility.RegulatoryTighteningExpectationsRise,FinancialSupervisoryServiceTakestheLead-------------------LeeChan-jin,headoftheFinancialSupervisoryService,hadalreadyexpressedpersonalregretoverapprovingtheseproductsatapressconferenceonJune22."Wepushedforwardtoohastilyatthetime,"LeeChan-jinsaid."Lookingback,Iregretapprovingtheseproducts.PerhapsIshouldhavedoneeverythingIcouldtopreventtheirapproval."**Currently,financialauthoritiesarestudyingspecificmeasurestotightentheinvestmentthresholdsforsingle-stockleveragedETFs.TheBOK'spublicstatementthistimeisexpectedtoinjectstrongermomentumintorelevantdiscussions,furtherheatingupexpectationsofregulatorytightening.**Theregulatorycontroversycoincideswiththemarket'sfocusonSamsungElectronics'second-quarterearnings,whichwillbeannouncedonTuesday.Recently,stockpricevolatilityforSamsungElectronicsandSKHynixhasincreasedsignificantly.Marketparticipantssaythatifearningsbeatexpectations,itcouldreigniteoptimisminthechipindustryandfurtherboostinvestors'willingnesstoallocatetosemiconductor-relatedinvestmentproducts.RiskWarningandDisclaimerMarketriskexists;investmentrequirescaution.Thisarticledoesnotconstitutepersonalinvestmentadvice,nordoesitconsiderthespecificinvestmentobjectives,financialsituations,orneedsofindividualusers.Usersshouldconsiderwhetheranyopinions,views,orconclusionsinthisarticlearesuitablefortheirspecificcircumstances.Investmentbasedonthisarticleisatyourownrisk.

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Take a tougher stance! The Bank of Korea warns against leveraged ETF risks for SK hynix and Samsung Electronics

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