"Bought 2x and 3x Leveraged ETFs"... Korean Retail Investors at Home and Abroad "Cry the Blues"

Losses mount as investors buy leveraged ETFs in market downturn
KODEX Leverage alone attracts 810 billion won
Korean retail investors buy 3x leveraged ETFs... down 27% this month alone
Forced liquidations against unsettled trades total 89.3 billi

Losses are snowballing for retail investors who have bought large amounts of domestic and overseas leveraged exchange-traded funds (ETFs), betting on a rebound in the indexes during the recent downturn. To make matters worse, concerns are growing over forced liquidations tied to margin and credit-based trading.

"Is a Downturn an Opportunity?" Retail Investors Rush to Buy Leveraged ETFs

According to ETF Check on October 18, retail investors aggressively bought leveraged ETFs over the past week, betting on a rebound in the indexes amid a sharp plunge in the domestic stock market. The biggest net purchase among individual investors over the past week was KODEX Leverage, which tracks twice the daily return of the KOSPI 200 Index and attracted 812.8 billion won. Other top net purchases included KODEX KOSDAQ 150 Leverage (430.8 billion won), bought in anticipation of a rebound in the KOSDAQ market, as well as leveraged products offering twice the exposure to the semiconductor sector, which has recently fallen sharply, and to individual stocks. These included KODEX Semiconductor Leverage (192 billion won), KODEX SK hynix Single Stock Leverage (127.2 billion won), and TIGER Semiconductor TOP 10 Leverage (92.2 billion won).

Korean retail investors investing in U.S. stocks also focused on high-risk leveraged bets. According to the Korea Securities Depository's SEIBro system, the most heavily purchased overseas stock by these investors over the past week was Direxion Daily Semiconductor Bull 3X Shares (SOXL), which tracks three times the daily movement of the Philadelphia Semiconductor Index and drew net purchases of $2.6 billion (approximately 3.5 trillion won). They also made net purchases of $34.68 million in ProShares UltraPro QQQ (TQQQ), which tracks three times the Nasdaq-100 Index.

The problem is that losses on these leveraged ETFs have widened sharply as the indexes have continued to fall. Because leveraged products move two to three times as much as their underlying indexes, losses mount much faster in a downturn.

KODEX Leverage, which attracted the most investment, fell 33.15% over the past week. The losses were even more severe for semiconductor and single-stock leveraged ETFs. KODEX SK hynix Single Stock Leverage plunged 45.37%, TIGER Semiconductor TOP 10 Leverage fell 44.95%, and KODEX Semiconductor Leverage dropped 41.85%.

Korean retail investors who invested in U.S. three-times-leveraged products are also facing mounting losses. SOXL has plunged 27.35% since the start of October alone. Because losses on leveraged products accumulate at three times the decline in the underlying assets, investors' principal has been sharply eroded in a short period.

Forced Liquidations Surge Amid Market Plunge, Hitting Highest Level in More Than Two Months

As the stock market downturn drags on, the risk of forced liquidations is becoming a reality for domestic retail investors who have borrowed money to invest.

According to the Korea Financial Investment Association, forced liquidations against margin trading receivables totaled 89.3 billion won as of October 14. This was the highest level in nearly two months, since late July.

As stocks plunge, positions in margin trading that fail to meet maintenance margin requirements are forcibly sold into the market by securities firms. The resulting sell-off then pushes stock prices down further, perpetuating a vicious cycle.

A financial investment industry official urged caution, saying, "Taking excessive positions in two- or three-times-leveraged products or borrowing money to buy stocks when index volatility is extreme increases the risk of losses. If the market falls further, a wave of forced liquidations could accelerate the decline in stock prices, so investors should exercise particular caution with leveraged and margin-based investments for the time being."

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