After the government raised the investment barrier for domestic single-stock leverage products, a surge of funds has flowed into overseas leveraged Exchange Traded Funds (ETFs). Critics point out that leverage regulations are pushing demand for high-risk, high-return investments abroad, resulting in unintended capital outflows from Korea.
According to the Korea Securities Depository on August 5, from July 16, when the government announced its single-stock leverage measures, to August 3, the U.S. stock most heavily purchased by Korean investors was the 'Direxion Daily Semiconductor Bull 3X ETF (SOXL)'. The trading volume for SOXL purchases reached 4.63617 billion dollars, more than seven times greater than the second most purchased stock, Micron Technology, which stood at 515.35 million dollars. SOXL is a leveraged ETF that tracks U.S. semiconductor stocks at three times their daily performance.
During this period, three out of the top ten U.S. stocks most purchased by Korean investors were leveraged ETFs: SOXL, 'Direxion Daily MSCI South Korea Bull 3X ETF (KORU)', and 'DIREXION DAILY TSLA BULL 2X SHARES (TSLL)'. KORU tracks the KOSPI index at three times the daily return, while TSLL is a leveraged ETF that reflects twice the daily movement of Tesla’s share price. The combined purchase volume of these three leveraged ETFs was 5.1744 billion dollars—an increase of over 1 billion dollars compared to the previous 13 trading days, which totaled 4.14587 billion dollars.
As regulations on domestic single-stock leveraged products have ramped up, funds are shifting toward overseas leveraged ETFs. In response to concerns that single-stock leverage products were amplifying market volatility, the government announced on July 16 that the minimum margin requirement would be increased from 10 million won to 30 million won, and imposed a per-person investment limit of 20% as of July 29. Additionally, the Financial Services Commission is moving to revise the Capital Markets Act to provide legal grounds for taking market stabilization measures in emergencies, such as adjusting the leverage ratio for single-stock products.
Even on July 31, the first day the 30 million won margin requirement was implemented, SOXL remained the top U.S. stock purchased by Korean investors, with a trading value of 498.42 million dollars. The second most purchased was KORU, at 63.8 million dollars. Together, these two leveraged ETFs accounted for 80.2% of the total trading value among the top ten purchased products.
In contrast, the trading value of domestic single-stock leveraged products has plummeted. On July 30, individual and foreign investor trading in 16 domestic single-stock leveraged products amounted to 5.5431 trillion won and 4.8588 trillion won, respectively. After the heightened margin requirement, individual and foreign investors’ trading volumes dropped to 423.7 billion won and 1.0164 trillion won, respectively, on July 31, and further fell to 309.2 billion won and 488 billion won on August 4.
An industry insider commented, “Efforts such as amending the Commercial Act have raised the credibility of Korea’s capital markets in order to build advanced markets, but with the rapid tightening of regulations on single-stock leveraged products within just two months of their launch, regulatory risks are growing and trust in Korea could be eroded again.” They added, “It’s important to establish appropriate measures, but hasty responses may end up causing unintended capital outflows.”
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