Stronger stance! Bank of Korea warns SK Hynix and Samsung Electronics of leveraged ETF risks

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The Bank of Korea (BOK) has joined the ranks of regulators issuing warnings, raising risk alerts on single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix, suggesting that such products may amplify market volatility and intensify excessive concentration of the Korean stock market in a handful of semiconductor stocks.

On Sunday, the BOK responded in writing to an inquiry from opposition People Power Party lawmaker Park Sung-hoon, stating that these leveraged ETFs may reinforce one-sided trading behavior and further increase market volatility if investors rush in or pull out en masse; if stock prices fall sharply, ETF redemptions and portfolio rebalancing will magnify losses for retail investors and trigger broader market turmoil.

This statement is noticeably stronger than the wording used in the BOK’s Financial Stability Report released on June 24, when the central bank still believed such products could help attract foreign capital and curb capital outflows.

With the BOK now openly expressing similar concerns, discussions among financial regulators to tighten investment thresholds for single-stock leveraged ETFs are expected to accelerate.

Regulatory Warning Upgraded, Stance Clearly Shifted

The BOK noted in its written reply that as the profitability of the semiconductor sector improves, domestic equity markets are increasingly concentrated in a few semiconductor stocks. Samsung Electronics and SK Hynix together account for more than half of the Korean stock market’s market capitalization and trading volume, and the presence of single-stock leveraged ETFs may further intensify this concentration risk.

The statement contrasts sharply with the position taken in the BOK’s June 24 Financial Stability Report. In that report, the central bank cited the government’s original intent for launching such products, stating that single-stock leveraged ETFs "help provide domestic alternatives, curb capital outflows, and attract foreign inflows to Korea." This written warning uses much tougher language, marking a notable shift in the BOK’s stance.

Rapid Product Expansion Raises Market Concerns

On May 27 this year, Korean financial authorities approved the country’s first batch of single-stock leveraged ETFs, allowing local brokerages to launch 16 products tied to these two tech giants as part of government efforts to revive the domestic capital market. Unlike traditional leveraged ETFs tracking broad indices like the KOSPI 200 or S&P 500, these products offer investors leveraged exposure to individual stocks, with daily price changes tracking double that of the underlying shares.

Boosted by the rally in AI-related chips, these products have quickly gained popularity among investors. Fourteen leveraged ETFs saw a total monthly trading volume of 212 trillion won (about $138.6 billion) in June, accounting for 26.6% of total ETF turnover in the same period.

Shenwan Hongyuan Securities pointed out that since May, inflows into Korea’s 2x long ETFs have surged sharply, far exceeding other leveraged ETFs and ordinary market ETFs. History sounds a warning: During the 2017 and 2021 peaks and subsequent downturns in the Korean stock market, leveraged ETF sizes kept growing against the trend, resembling current movements.

To maintain the target leverage ratio, these ETFs typically buy when prices rise and sell when prices fall—a pro-cyclical mechanism that can enhance market price volatility.

Regulation Tightening Expectations Rise, Financial Supervisory Service Leads the Charge

Lee Chan-jin, head of Korea’s Financial Supervisory Service, had already stated publicly at a news conference on June 22 that he personally regretted approving these products. "At the time we acted too hastily," Lee Chan-jin said. "Looking back, I regret approving these products, and maybe I should have done everything possible to stop their approval."

Authorities are currently studying specific measures to tighten investment thresholds for single-stock leveraged ETFs. With the central bank’s latest public statement, these discussions are expected to gain further momentum, and prospects for tougher regulations are intensifying.

This regulatory dispute comes as the market is watching for Samsung Electronics’ second-quarter earnings, scheduled to be released this Tuesday. Recently, shares of Samsung Electronics and SK Hynix have seen significantly increased volatility. Market participants say if earnings beat expectations, it may rekindle optimism for the chip sector and further boost investor appetite for semiconductor-related investment products.

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