South Korea Stops New Leveraged ETFs After $12 Billion Retail Inflows in One Month

South Korea's government announced Wednesday that it would stop approving new leveraged ETFs and tighten investor requirements for existing ones. The move follows the May launch of single-stock products that drew $12 billion in assets within a month, according to HSBC data. Insider reported that leveraged ETFs now hold roughly $200 billion in U.S.

Investor money and command $500 billion in notional exposure. More than 400 of the 700 U.S. leveraged ETFs have launched in the past two years, Baird Strategas data showed. Lee Chan-jin, governor of the Financial Supervisory Service, said in June he regretted approving the products.

"Maybe I should have lain down on the floor to block it," he stated. The ETFs reset daily, which produces volatility decay even when an investor correctly predicts direction. An example from the reporting shows a $1,000 stake in a 2x ETF falling to $960 after a 10 percent stock gain followed by a 10 percent loss, while an unleveraged holder would lose only $10.

Two T-REX leveraged ETFs tied to Strategy, formerly MicroStrategy, lost about 95 percent of their value between their September 2024 launch and the end of June, while the underlying stock fell 38 percent. Sponsors charge about 1 percent in fees, and the swaps used to create leverage can add another 5 to 6 percent, Brent Coggins, CIO of Triad Wealth, said.

Markets. On some days the ETFs accounted for as much as 35 percent of Korean stock turnover, HSBC analysts noted. The ProShares UltraPro QQQ, the largest U.S. leveraged ETF, holds $38 billion and has returned more than 32,000 percent since launch, though it has experienced drawdowns of up to 80 percent.