Full-scale plunge! In South Korea, leveraged ETFs tied to Samsung and SK Hynix have nearly all fallen below their offering price, and politicians are calling for delisting.

Under the severe turbulence of the South Korean stock market, single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix have been hit hard, with 13 out of 14 products falling below the 20k won issuance price, and some products' intraday declines once expanded to about 20%. This crash not only continues to widen losses for leveraged investors but has also triggered a strong backlash from the political sector, with calls for mandatory delisting suddenly heating up.

On July 7, as Samsung Electronics closed down 6.92% and SK Hynix closed down 6.06%, all 14 single-stock 2x leveraged ETFs plummeted by 12% to 13%. Among them, the KODEX Samsung Electronics single-stock leveraged ETF closed at 18,310 won, down 13.71%; the TIGER Samsung Electronics single-stock leveraged ETF fell even further by 13.88%, hitting an intraday low of 15,705 won.

On that day, the total trading volume of the 16 single-stock leveraged and inverse ETFs reached 13.113 trillion won, exceeding one-third of the total ETF trading volume on the entire market (36.481 trillion won). The sharp fluctuations of leveraged products further intensified the downward pressure on the KOSPI, triggering a programmed sell order suspension (sidecar) and a circuit breaker mechanism that day.

South Korea's Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-chul stated at the National Assembly's Strategy and Finance Committee, "The government is fully aware of concerns that leveraged ETFs exacerbate market volatility, and relevant departments are discussing how to minimize volatility." Meanwhile, Ahn Cheol-soo, a lawmaker from the main opposition People Power Party, publicly criticized these products as "a complete policy failure" and called for strong regulatory intervention, including forced delisting, saying "the KOSPI has turned into a casino."

Intraday declines once approached 20%, with 13 products falling below the issuance price

The trigger for this crash was the simultaneous sharp declines of Samsung Electronics and SK Hynix on July 7. Since these leveraged ETFs track the underlying stocks with 2x leverage, the decline of the underlying stocks was amplified twofold.

The seven Samsung Electronics leveraged ETFs all fell in the 13% range, while the seven SK Hynix leveraged ETFs all fell in the 12% range.

Specifically, the KODEX Samsung Electronics single-stock leveraged ETF closed at 18,310 won, down 13.71%; the KODEX SK Hynix single-stock leveraged ETF closed at 22,130 won, down 12.56%; the TIGER Samsung Electronics single-stock leveraged ETF fell 13.88%, and the TIGER SK Hynix single-stock leveraged ETF fell 12.44%.

The intraday decline further expanded, with leveraged ETFs for both underlying stocks hitting new intraday lows since listing, with declines once expanding to about 20%. The KODEX Samsung Electronics single-stock leveraged ETF hit an intraday low of 17,100 won, while the TIGER Samsung Electronics single-stock leveraged ETF fell to an intraday low of 15,705 won.

Among the 14 products, except for the KODEX SK Hynix single-stock leveraged ETF, the remaining 13 all fell below the 20k won issuance price.

In stark contrast to the brutal performance of leveraged products, inverse 2x products that bet on the decline of the underlying stocks (commonly known as "short buses") surged significantly that day. The SOL SK Hynix Futures single-stock inverse 2X closed up 11.84%, and the PLUS Samsung Electronics Futures single-stock inverse 2X closed up 12.68%.

In terms of trading volume, the total turnover of the 16 single-stock leveraged and inverse ETFs on that day reached 13.113 trillion won, accounting for more than one-third of the total ETF turnover of 36.481 trillion won on the entire market, indicating high market attention and active trading in these high-volatility products.

However, the massive trading volume also means that the influence of these products on the broader market cannot be ignored. Since Samsung Electronics and SK Hynix together account for more than half of the KOSPI's market capitalization, the hedging and daily rebalancing trades of leveraged ETFs impose additional selling pressure on the underlying stocks, further amplifying the market decline and ultimately triggering the circuit breaker.

Investor losses continue to widen, with the "negative compounding effect" eroding principal

This crash has sharply expanded the paper losses of leveraged ETF investors, and the structural flaws of the products themselves expose long-term holders to greater risks.

According to data from the Korea Exchange and Koscom CHECK, as of July 6, the total net asset value (NAV) of the 16 single-stock leveraged ETFs stood at 14.9126 trillion won, down 15.3% from 17.5994 trillion won on June 25, shrinking by about 3 trillion won.

Kim Seok-hwan, a researcher at Mirae Asset Securities, stated that the NAV of single-stock leveraged ETFs has fallen about 3 trillion won from its peak, recording net losses.

"Based on the KODEX and TIGER series with the largest NAV, net inflows continue to increase, but in terms of valuation losses, the Samsung Electronics series lost about 400 billion won, and the SK Hynix series lost about 600 billion won."

Leveraged products produce a "negative compounding effect" when the underlying asset fluctuates repeatedly. Even if the underlying stock eventually returns to its starting point, long-term holders may suffer greater losses due to the continuous erosion of principal. Feedback voices of "investment continuously evaporating" have appeared in the investor community.

Political sector calls for forced delisting, regulatory attitude cautious

As market turmoil intensifies, calls for forced delisting have quickly gained momentum.

Ahn Cheol-soo, a lawmaker from the South Korean People Power Party, posted on social media, viewing the cumulative trading volume of these products, 212 trillion won (approximately 139 billion USD), as a driver of sharp stock price fluctuations, and pointed out that all 14 single-stock leveraged ETFs recorded negative returns over the past month, with the maximum loss reaching 35.9%.

He called for strong corrective measures, including forced delisting, and demanded that President Lee Jae-myung immediately dismiss the Chairman of the Financial Services Commission and the Governor of the Financial Supervisory Service.

Rep. Han Jeoung-ae, policy committee chair of the ruling Democratic Party, also stated that the party would assess whether these ETFs have exacerbated risks for retail investors before deciding whether additional regulatory measures are needed.

However, market participants generally believe that the possibility of forced delisting is extremely low. If all 16 products are forcibly delisted at once, it could trigger market chaos and damage investor confidence.

From a legal perspective, according to Korea Exchange rules, ETFs are typically delisted only under specific circumstances such as the delisting of the underlying stock or severe disclosure violations by the issuer, and there is currently no sufficient legal basis for such action.

An official from the Financial Supervisory Service said that regulators are evaluating a series of alternative measures, including tightening product trading requirements to curb speculative trading, but have not yet reached a conclusion. "Any regulatory adjustments need to comprehensively consider the impact on the broader market."

In fact, the controversy over these products can be traced back to their listing. On May 27 this year, 14 leveraged ETFs and 2 inverse ETFs tracking Samsung Electronics and SK Hynix were listed simultaneously, attracting significant investor attention driven by the artificial intelligence investment craze. However, less than two months after listing, a series of side effects have already been exposed.

According to reports from The Korea Times, Lee Chan-jin, Governor of the Financial Supervisory Service, had previously expressed regret over approving these products. He admitted at a press conference on June 22: "We pushed ahead too hastily at the time. Perhaps I should have done my utmost to prevent their approval."

The Bank of Korea also warned in a written response submitted to Rep. Park Sung-hoon of the People Power Party that single-stock leveraged ETFs could lead to excessive capital concentration in a few stocks and exacerbate market volatility through daily fund rebalancing.

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