South Korea president urges action on leveraged stock funds

South Korean President Lee Jae Myung urged financial regulators to take quick action over leveraged single-stock exchange-traded funds tied to Samsung Electronics and SK hynix, after falls in the companies' share prices left investors with losses.

The country's main bourse, KOSPI, introduced the products in late May. The funds are linked separately to Samsung Electronics and SK hynix, which the source described as important memory chip producers for the fast-growing AI industry and as forecasting record profits. The funds are designed to pay twice the gains of a single stock, but they also carry twice the losses.

Since the ETFs were listed on May 27, shares in Samsung Electronics have fallen around 16 percent and shares in SK hynix have fallen around 20 percent, leaving speculators with amplified losses. The products have been criticised for exposing retail investors to market hype and volatility.

At a Tuesday cabinet meeting, Lee told the head of the Financial Services Commission to take the necessary measures quickly and aggressively. In a livestream of the meeting, he did not explain which measures he supported. He said there were competing views on ETFs linked to national flagship technology companies: supporters argue they reduce capital outflows by giving South Korean investors domestic alternatives to overseas single-stock leveraged ETFs, while critics say they have increased market volatility by encouraging speculative trading.

Lee Chan-jin, governor of South Korea's Financial Supervisory Service, said last month that regulators had approved the ETFs too hastily and said he personally regretted it. The government last week tightened rules for the products by raising the minimum deposit to 30 million won, or $20,280, and requiring investors to pay for purchases fully in cash.

Economic Democracy 21, a South Korean non-governmental organisation, said the government failed to protect individual investors when the leveraged ETFs were introduced. The group said regulators should have been careful because the products are inherently high-risk and because compounding effects can wipe out an investor's entire principal over a short period. It also said a single-stock leveraged fund conflicts with diversification requirements imposed on conventional public funds.

The KOSPI has risen 58 percent so far this year, helped by sharp gains in Samsung Electronics and SK hynix, but the rally has also been volatile. After reaching a record high of 9,385 on June 19, the KOSPI had fallen 28 percent as of Tuesday morning.