Risk-Loving Koreans Lose Big on Leveraged ETFs Amid Stock Swoon

A sudden swoon in US tech stocks is dealing a blow to South Korea’s mom-and-pop investors who have placed billions of dollars of leveraged bets on the cohort. 

The country’s retail investors held at least 11% of two exchange-traded funds that place amplified wagers on the Nasdaq 100 Index — bets that may go awry as the US tech benchmark nears a correction. They held 14% of a GraniteShares product that tracks twice the moves of Nvidia Corp., whose stock has tumbled 25% from a January high.

South Koreans’ embrace of risk paid off over the past couple of years, when the US stock rally seemed unstoppable. It appeared an even smarter move as the local Kospi Index floundered. But the recent tech selloff has sent a chill through the retail crowd and put Korean regulators on alert for another potential episode of hefty investor losses. 

The Financial Services Commission has tightened scrutiny on the sales of structured securities after some investors saw their retirement savings wiped out. Authorities are also assessing measures to curb investment in leveraged exchange-traded products listed overseas, people with knowledge of the matter said last week. 

South Korean authorities are also considering aligning the overseas leveraged ETP trading rules with those on products listed at home, they said. 

South Korean investors added a net $1.78 billion to their holdings of five leveraged ETFs in the US this year through March 7, according to depository data calculated by Bloomberg. Most of that inflow went into an ETF tracking twice the moves of Tesla Inc.’s stock, the data show.

“Korean retail investors have a strong penchant for momentum trading and exhibit a herd mentality, so many investors seek high risks, high returns,” said Je Lee, director at CSOP Asset Management Ltd. “Low fees and trading platforms from domestic brokerages are increasing access and the ease of trading so individual investors are expected to ramp up overseas ETF trading even more.”

While the explosive growth of leveraged ETFs has been a global phenomenon, few countries match the fervor in South Korea, where investing overseas is seen as a quick and easy way to accumulate wealth. 

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