A $9.4 billion trap: The hot investment that turned into a nightmare

The decision by the regulator in South Korea to approve double-leveraged ETFs on the country's major technology stocks, Samsung and SK Hynix, was intended to bring local investors back home. The move worked beyond expectations, and the public poured $9.4 billion into these funds in less than two months. However, the timing turned out to be extremely poor: the market experienced a sharp correction, chip stocks plummeted, and investors who were looking for quick profits found themselves facing huge losses.

The daily revaluation trap

The central problem with leveraged funds stems from the need for fund managers to hold assets worth double the original stock every day. To meet this target, they are forced to buy more shares when the price rises and sell when it falls. This action creates a volatility loop that exacerbates market fluctuations. Thus, while Samsung and SK Hynix shares fell by approximately 15% and 18% respectively during a certain period, the funds focused on them collapsed by 40% and 49% respectively.

These losses are not temporary. A simulation by a Korean investment firm showed that due to the daily balancing mechanism, known as "volatility decay," even if the original stocks fully recover and return to their original price after a year, the leveraged funds will still record a loss of 63% to 75%. This means that long-term investors in these products are almost unable to recoup their investment in a volatile market, as the funds revalue the return every single day.

The danger reaches Wall Street

This phenomenon is not unique to South Korea. In the United States, there are similar funds tracking giants like Tesla, Nvidia, and Microsoft, which manage about $65 billion, with most of the trading done by private investors. The results there are similar: a double-leveraged fund on Tesla fell by 51% in half a year, while the stock itself fell by only 20%. A similar fund on Microsoft lost about 12% this year, even though the stock itself rose by 2%.

The US Securities and Exchange Commission (SEC) is currently examining the rules regarding these complex ETFs. Despite previous warnings from the commission that investors do not understand the impact of daily revaluation, there is no mandatory training for investors in these products in the United States. To prevent a collapse similar to the one experienced by investors in Korea, the regulator must act quickly and completely ban the marketing of these leveraged funds to the general public.