Korean leverage ETF curbs cool local trading as investors look to offshore products

Trading in South Korea’s single-stock leveraged and inverse exchange-traded funds has slowed after new rules took effect on July 31, raising the entry threshold for retail investors. Korea Exchange data showed that turnover in 16 such products reached 941.2 billion won on Aug. 7, after 919.8 billion won in the previous session, marking a second straight trading day below 1 trillion won. Market participants cited the new restrictions as the main reason for the drop. The rules raised the base margin requirement for ordinary retail investors in single-stock leveraged ETFs from 10 million won to 30 million won in cash. Still, local securities firms said demand has not disappeared. Instead, money appears to be shifting into semiconductor leveraged ETFs and offshore-listed leveraged products, a pattern described as regulatory arbitrage or a balloon effect. Korea Investment & Securities researcher Jeong Hyun-jong said trading in single-stock leveraged ETFs fell after the rules took effect, while turnover in semiconductor leveraged ETFs increased. He added that offshore single-stock leveraged ETFs could attract more Korean demand because they are not subject to domestic restrictions, citing Hong Kong-listed CSOP SK Hynix Daily (2x) Leveraged Product as one of the world’s largest products in this category by market value.