"Up to -60% Returns in a Flash"... Leveraged ETF/ETN Investment Warning

Financial authorities have issued a warning about the risks associated with investing in leveraged and inverse Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). This comes as individual investors are flocking to leveraged and inverse ETF/ETN products, which have greater price volatility compared to standard ETF/ETN products, amid heightened volatility in financial markets due to factors such as the Middle East conflict.

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On March 18, the Financial Supervisory Service provided guidance on precautions related to investing in leveraged and inverse ETFs and ETNs. Leveraged ETF/ETN products are designed to track the daily returns of a specific index at a multiple, such as two times. Inverse ETF/ETN products track the returns in the opposite direction, such as -1x or -2x.

The risk of leveraged and inverse products stems from the fact that losses can be magnified over a short period. In the domestic stock market, where the price limit is ±30%, a maximum loss of up to 60% can occur in a single day. For leveraged products, investors should be cautious if stock prices fall; for inverse products, caution is required when stock prices rise.

Losses can also be amplified during long-term investments if stock prices fluctuate up and down. It is important to recognize that these products are intended for short-term trading. For example, if an index falls by 20% and then rises by 20%, a standard product would see a move from 100 to 80 to 96, resulting in a 4% loss. However, a leveraged product would move from 100 to 60 to 84, resulting in a 16% loss. This phenomenon is the same for inverse products.

Investors should also check the divergence rate, which shows the difference between the actual value and the market value when trading these products. Leveraged and inverse products tend to have a higher divergence rate than standard products. For example, if the actual value per ETF share is 10,000 won but it is trading at 10,200 won in the market, the divergence rate is +2%, meaning it is trading at a premium over its actual value.

The reason the Financial Supervisory Service is issuing this investment advisory is due to the rapid surge in investments in these products. As of March 10, the market capitalization of leveraged and inverse ETFs and ETNs stood at 21.7 trillion won. This marks an increase of over 9 trillion won compared to the end of last year (12.4 trillion won).

The number of individuals completing the required pre-investment education has also risen significantly. To invest in these products, investors must complete a mandatory one-hour pre-education session. While 205,000 people completed the program over the course of last year, 300,000 completed it in just the two months from January to February this year.

A Financial Supervisory Service official stated, "We will continue to monitor investment trends in leveraged and inverse products, and will supervise securities firms and asset management companies to ensure they properly complete the related filing forms."

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