In June 2006, U.S. asset manager ProShares listed eight exchange-traded funds (ETFs) on the New York Stock Exchange that tracked twice the returns of the Nasdaq 100, S&P 500, Dow and Russell 2000 indexes. They were hailed as "innovation" for making hedge fund strategies easily accessible to individual investors. It marked the emergence of the world's first leveraged ETFs, arriving 13 years after ETFs were born as derivative ETFs. A month later, inverse products that doubled returns as indexes fell were also introduced.
The evolution continued. In 2010, the triple-leveraged Nasdaq 100 ETF (TQQQ), dubbed a "holy site" for Korean retail investors trading overseas, appeared. In 2022, the era of single-stock leverage opened with products tracking individual names such as Nvidia and Tesla at twice their returns. More than 400 single-stock leveraged and inverse products are currently trading on U.S. markets.
In Korea, the KODEX ETF took its first step in 2002, and in 2010 a leveraged product tracking the KOSPI 200 index was listed. Domestic ETFs now number about 1,200, with total assets exceeding 500 trillion won. In May this year, a major turning point came to the ETF market. The market shifted dramatically as products tracking twice the returns of Samsung Electronics and SK hynix appeared. Some 740,000 investors received education to trade "Samsung-nix" leverage, and the market capitalization swelled to 12 trillion won in less than two months. The top two stocks by KOSPI market cap, once "people's stocks," have somehow become "people's leverage."
By nature, leveraged ETFs are high-risk derivatives. But investors seeking a "big hit" swarmed like moths to just these two names, and Korea's stock market fell into an unprecedented "volatility hell." The problem is that the market has grown so large that even drastic remedies such as delisting cannot be used. It is a dilemma with no way out.
Belatedly, financial authorities raised the basic deposit from 10 million won to 30 million won, strengthened education and introduced supplementary measures such as trading in blocks of 20 shares, but their effectiveness is questionable. This is why criticism is being aimed at authorities that hastily permitted leveraged products in the first place to manage the exchange rate rather than for investment purposes. Innovation grows markets, but "innovation in name only" merely shakes them.
