"Just Holding on Can Be Dangerous"... How to Accelerate Principal Recovery in Samsung Electronics and SK hynix Leveraged ETFs [Weekend Money]

An analysis has found that, in order to reduce the principal recovery period when losses occur with single-stock leveraged exchange-traded funds (ETFs), investors need to avoid emotional trading and adopt a planned capital allocation strategy.

According to DB Financial Investment, as volatility in the domestic stock market rapidly increases, the magnitude of principal losses for single-stock leveraged investors is also growing. Amid this situation, the advice is not to engage in emotional trading. Taehyun Seol, a researcher at DB Financial Investment, stated, "The loss aversion psychology that arises during declining stock prices interferes with objective loss-cutting and position-adjustment timing, and triggers unplanned capital injections. It is important to eliminate intuition or vague expectations about a recovery and to establish a quantitative, data-driven response framework."

Because Samsung Electronics and SK hynix only simultaneously enter a downward phase 44.6% and 30.5% of the time, respectively, when the market enters a downturn, it is analyzed that each stock displays its own price trajectory. This means that a rules-based response strategy considering each stock’s unique characteristics is necessary. In a bearish market phase, the stock return trajectories of Samsung Electronics and SK hynix show clear structural differences. Seol explained, "When entering a bear market, Samsung Electronics tends to have a relatively moderate decline and a gentle recovery path, whereas SK hynix shows a high-volatility pattern, posting a steeper initial drop and then rebounding sharply."

Leveraged products based on Samsung Electronics and SK hynix experienced a steep expansion of losses as daily volatility decay accumulated throughout declining and sideways phases. Seol pointed out, "The longer a bear market lasts, the more asymmetrically the recovery potential of leveraged products is impaired compared to their underlying stocks. Unconditionally holding leveraged positions for the long term after entering a loss state following a market peak dramatically reduces the probability of recovering principal, due to the structural decay of leverage."

To avoid structural losses of single-stock leverage and shorten the principal recovery period, it is essential to establish clear and quantitative guidelines for capital deployment. Seol presented a strategy of splitting capital allocation by various maximum drawdown (MDD) sub-ranges.

The analysis found that, when Samsung Electronics (1x leverage) stock price enters an MDD range of -30% to -35%, the median number of trading days required to recover principal is 253 days. If an additional 50% of the initial investment amount is injected at this point, the recovery period shortens to 184 trading days. For Samsung Electronics leveraged (2x) products, entering the same -30% to -35% MDD range requires a median recovery period of 354 days, but this is reduced to 193 days with a 50% additional investment.

For SK hynix leveraged (2x) products, if the price enters an MDD zone below -45% with no additional investment, it takes 1,260 trading days to recover principal. However, injecting an additional 30% in capital reduces the recovery period significantly, to 152 trading days.

Seol emphasized, "The analysis applies double the daily closing return, so when factoring in volatility decay and tracking error in real market conditions, the actual principal recovery period may be longer than the figures presented. It is important to quantitatively manage rising market risks by considering MDD contraction, the proportion of additional investment, and their impact on principal recovery periods and probabilities."

This content was produced with the assistance of AI translation services.