Two Chipmakers, Twice the Bet: Korea's Single-Stock Leveraged ETF Losses

Korean individual investors have taken ₩2.3242 trillion in realized losses on leveraged ETFs that track a single stock, either Samsung Electronics or SK hynix. These are losses they took when they sold. That is the total for the first two and a half months after these products launched, according to Korean financial press (in Korean). I have never bought one of these funds, and I don’t plan to. This post explains why, and what I see in the people around me who do use leverage.

What Is Going On

A leveraged ETF of this type aims to move twice as much as the stock does in a single day. When the stock goes up, the gain is bigger. When it goes down, the loss is bigger too. Local reports this week were blunt about it: if you are new to stocks, the safer choice is not to buy these at all.

The timing makes the losses easier to understand. On October 6, KOSPI rose as high as 7,044.67 early in the day, then turned down and fell back below 7,000 the same day. On October 7 it fell 1.98% to close at 6,803.90. Reports pointed to rebounding oil prices and US Treasury yields, and to caution before Samsung’s preliminary third-quarter results. The same reports mentioned hopes that Samsung’s quarterly operating profit will pass ₩100 trillion for the first time, and also warnings that the share price could swing more in the short term around the release.

The signals are mixed. Some brokerage analysts say AI demand has made the chip business strong while the share prices have not caught up, so “now is the time to invest in semiconductors.” At the same time, foreign investors have been selling both Samsung Electronics and SK hynix. Meanwhile, Taiwan’s main index hit a record 49,712.04 on October 5. KOSPI, which at one point had the biggest gain this year among major markets, fell behind Taiwan’s index on that measure.

One Bet, Held Three Times

For readers outside Korea, one fact matters more than any other here. Samsung Electronics and SK hynix together make up close to half of KOSPI’s total market value. So when Koreans say “the market” this year, they mostly mean two chipmakers. I wrote more about Korea’s chip boom in another post.

The overlap does not stop at the index. Most Korean semiconductor ETFs invest mainly in these same two companies. In the ETFs that focus on a few major chip names, the two together are more than half the fund. Local reports advised people who already own the individual shares to check how much their ETF holds of the same stocks.

Put that together. Someone who owns Samsung shares, a Korean chip ETF, and a single-stock leveraged ETF on Samsung may feel diversified across three products. In practice, it is one bet, held three times, with the last one doubled each day.

Why I Stay Out

My plan is simple. I buy, and I plan to sell only after ten years or more. Leverage does not fit that plan. It goes up more when prices rise, but it also falls more when they drop. When the swings are large, I believe that works against you over the long run.

I decided this when I started investing. Leverage is not my area. I want to make money slowly, but steadily.

I can handle about as much volatility as the Nasdaq-100 index has. That is not a calm index. Its maximum drawdown in the past was more than 80%, and even during COVID it fell about 30%. Those are already big drops. I judged that I could not live with a product that moves twice as much as that index each day.

Who I See Buying

There are people around me who invest only through leverage. What they buy varies: semiconductors, Samsung Electronics, SK hynix, crypto, Tesla. It seems to be mostly whatever is in the news at the time.

But most of them own real estate. Compared with the money they have in property, the amount they put into leveraged stocks looks small. I don’t know anyone who keeps their whole net worth in leveraged investments for the long term.

So when I read ₩2.3 trillion, I don’t know whose money it was. In my circle, leverage is a small side bet next to a home. I cannot tell from the headline how many of the people who lost it had that kind of base under them, and how many did not.

Samsung’s earnings are out this week, and the reports already expect bigger swings. For a fund that doubles each day’s move, that is the week to watch.