Retail investors are estimated to have lost 2.3 trillion won ($1.7 billion) from leveraged exchange-traded products tracking South Korea’s two chipmaking giants in just months, according to a lawmaker’s office, in the first revelation of the magnitude of risks from such bets.
Clients of 10 Korean brokerages incurred the losses from single-stock ETFs and notes tied to Samsung Electronics Co. and SK Hynix Inc. between May 27 and Aug. 14, according to the office of Choi Eun-seok, a lawmaker from the opposition People Power Party.
The losses followed a surge in leveraged bets on South Korea’s AI-centric stock market. The wild swings caused by the risky products have since prompted regulators to cool the fervour among mom-and-pop investors, resulting in a plunge in trading volume.
Here’s a look at what the leveraged ETFs are, why they are risky and what Indian investors can learn from South Korea’s markets
What are leveraged ETFs?
Leveraged ETFs aim to deliver multiples of an underlying stock’s or index’s daily returns.
“They promise two or three times the daily return of a stock or index. The keyword is daily. The fund resets its exposure every single day, so over a month, it does not give you 2x the return. It gives you 2x of each day’s move, compounded. Retail investors buy it as a long-term turbocharged version of the stock. It is a trading instrument with an expiry built into its maths,” said Sidharth Sogani Jain, founder, CEO and fund manager at Blue Aster Capital and CREBACO Global.
But, most investors often miss out on the math.
“Take a stock that rises 5% and falls 5% on alternate days for ten trading days. The stock ends down about 1.2%. A 2x ETF ends down about 4.9%, and a 3x ETF ends down nearly 11%. The stock went nowhere, and the 3x fund lost about nine times as much. That is volatility decay. The recovery maths is worse. A fund that falls 82% needs a gain of roughly 456% just to get back to where it started.”
When they are useful, and when they are dangerous
Institutions use leveraged ETFs for positions measured in days, sized at a small slice of the book and watched daily. They become dangerous in four situations:
- when held for months
- when bought after a sharp rally
- when funded with borrowed money
- when they grow into a large share of the portfolio
- If you cannot watch the position every day, you should not own it.
What went wrong in South Korea?
According to Jain, retail investors bought about 14 trillion won ($9.4 billion) of single-stock leveraged ETFs, while holding around 92% of the assets in products linked to Samsung and SK Hynix.
When the market reversed in July, SK Hynix fell about 35% and Samsung Electronics about 21%, Jain said. By 29 July, the largest 2x SK Hynix fund had lost about 82% from its June peak.
But, regulation came after the damage
“Korean regulators raised the minimum cash deposit for these products from 10 million won to 30 million won and made education and mock trading compulsory. But by August, nearly $1 billion had already left the Samsung and SK Hynix leveraged funds in a single month. Regulation usually arrives after the losses, not before,” he added.
India has its own version of this story
Indian investors face similar risks through futures and options (F&O), where leverage can magnify losses.
SEBI’s study found that over 91% of individual derivatives traders lost money in FY25. Their net losses rose 41% in a year, to about ₹1.06 lakh crore. Indian investors can also access US-listed leveraged funds through overseas platforms.
“Conviction in AI or semiconductors is not a reason to use leverage,” Jain said. For long-term exposure, diversified ETFs or the underlying stocks may avoid the additional compounding risks of daily-reset leveraged products.