After South Korea Tightens Leverage Controls, Local Retail Investors Flock to US 3x ETFs

After South Korean financial authorities tightened regulations on single-stock leveraged ETFs, domestic trading volumes plunged by more than 90%. However, demand for high-risk investments did not dissipate; instead, it rapidly shifted to the US market. Investors are buying US leveraged ETF products with higher multiples and greater risks without constraint, casting doubt on the actual effectiveness of the regulatory policies.

According to data from the Korea Securities Depository, between July 16 and August 3, Direxion Semicon Bull 3X (SOXL) ranked first in settlement value for overseas stock purchases by South Korean individual investors, with a total settlement value reaching $4.636 billion.

During the same period, purchases of Proshares UltraPro QQQ (TQQQ) amounted to $393 million, net purchases of the Tesla 2x Leveraged ETF (TSLL) reached $214 million, and the 3x Leveraged South Korea ETF (KORU) also recorded a net inflow of $131 million.

This capital flow directly challenges the original intent of the regulation. Analysts point out that as domestic products faced restrictions, investors turned to offshore products that carry exchange rate risks and offer higher leverage multiples. As a result, actual risk exposure has increased rather than decreased, creating a clear "balloon effect" from the regulation.

Domestic Trading Volume in South Korea Plummets by Nearly 90%

According to the KRX Information Data System, after the implementation of regulatory measures, the trading volume of the 16 single-stock leveraged and inverse ETFs listed in South Korea dropped sharply from 13.04 trillion South Korean won on July 15 to 1.33 trillion South Korean won on August 4, a decline of 89.8%.

The core measure of this regulation was a significant increase in the basic deposit threshold—adjusted from 10 million South Korean won (including eligible securities) to 30 million South Korean won in cash—while also setting investment limits for individual investors.

On the day before the regulations took effect (July 30), purchase transaction values by individuals and foreigners were 5.54 trillion South Korean won and 4.86 trillion South Korean won, respectively. On the day after the new deposit rules came into force (July 31), these figures plummeted to 423.7 billion South Korean won and 1.02 trillion South Korean won, respectively, further narrowing to 309.2 billion South Korean won and 488 billion South Korean won by August 4.

The background for the tightened regulation lies in the structural risks inherent in single-stock leveraged ETFs. These products track twice the daily return of the underlying asset. In highly volatile markets, they can produce a so-called "negative compounding effect," causing losses to expand continuously over time and making it difficult to recover principal.

Seol Tae-hyun, a researcher at DB Financial Investment, stated that for single-stock leveraged products, losses exceed those of the underlying asset during prolonged bear markets due to volatility decay. "Rather than emotionally adding positions to cover losses, data-driven investment strategies are more necessary."

Capital Outflow: US Triple-Leveraged Products Become New Favorites

As domestic regulations tightened, enthusiasm among South Korean individual investors for buying leveraged products in the US market clearly intensified.

In July, the net purchase value of overseas stocks by South Korean individual investors reached $4.58 billion (approximately 6 trillion South Korean won), marking the fifth-highest monthly figure on record. Of this, net purchases of US stocks surged from $630 million in the previous month to $4.64 billion, with leveraged ETFs such as SOXL, TQQQ, and QLD, as well as SK Hynix ADRs, ranking among the top net purchases.

Notably, leveraged products in the US market are more complex in terms of risk dimensions: investors not only face leverage exposure of up to three times but must also simultaneously bear exchange rate fluctuation risks, resulting in significantly higher overall volatility compared to regulated domestic products.

Park Chang-yoon, CEO of GL Research, pointed out that one of the original purposes of introducing single-stock leveraged ETFs was to redirect investment demand flowing overseas back to the domestic market, which also helps stabilize exchange rates.

He stated, "Continuous strengthening of regulations in the short term may produce the side effect of driving investors back to overseas leveraged products." He suggested that authorities should provide sufficient notice periods and improve the system in stages after confirming the market stabilization effects, thereby enhancing investor predictability and policy credibility.

Doubts Over Policy Effectiveness, Academics Call for Review

Academics have raised explicit doubts about the actual effectiveness of this regulation.

Son Jae-seong, a professor in the Department of Accounting at Soongsil University, stated that this regulation has a strong "reactive remedy" nature, being implemented after losses had already occurred. "The volatility of domestic single-stock leveraged ETFs is too high, while the US market is relatively stable. The migration of investors to overseas leveraged ETFs is a natural result."

He also warned that under the current structure, where domestic products are restricted while overseas products remain unconstrained, the trend of capital continuing to concentrate offshore may be difficult to reverse.

There are also voices within the industry suggesting that the direction of regulation needs to be re-examined. Implementing additional regulations consecutively without observing the effects of existing policies may trigger greater market backlash and confusion.