Bae Jae-kyu, the head of Korea Investment Management, stated on the 20th, “Despite potential backlash, we ask that you cease investing in individual stock leveraged exchange-traded products.”
In a Facebook post titled “Performance Analysis of Single-Stock Leveraged Inverse 2x Products” on that day, Bae remarked, “As the CEO of an asset management firm that manages single-stock leveraged ETFs (exchange-traded funds), I regret to say this. The takeaway is straightforward: Avoid investing in single-stock leveraged or inverse 2x ETFs.”
Bae, who was instrumental in bringing ETFs to South Korea in 2002 and is known as the “father of ETFs,” leads KIM, a mid-sized asset management company that holds the 3rd or 4th position in the sector. KIM offers products like the “ACE Samsung Electronics Single-Stock Leveraged” and “ACE SK Hynix Single-Stock Leveraged.”
Bae stated, “Even if time goes by and the base stock reverts to its initial price, the ETF’s value is unlikely to do the same. Particularly with the underlying stock’s volatility remaining as intense as it is currently, the structure leads to daily losses piling up.” He further noted, “No one could have predicted such extreme volatility.”
A picture included with the post illustrated the price movements of SK Hynix’s base stock along with its leveraged or inverse products. The data indicated that SK Hynix dropped from 2.243 million South Korean won on May 27 to 1.842 million South Korean won on the 16th, representing a 17.9% decrease.
In the same timeframe, the top SK Hynix single-stock leveraged product in terms of trading volume and assets under management (AUM) experienced a 47.5% loss. Although the expected loss rate—calculated as twice the 17.9% decline in the underlying stock—was 35.8%, the real loss was 11.7 percentage points higher.
The SK Hynix single-stock “inverse 2x” product also failed to perform well. Even though the base stock dropped by 17.9%, which should have theoretically led to a 35.8% increase, the product ended up with a 31.1% loss. The difference between what investors anticipated and the actual results was 66.9 percentage points. This gap occurred because, although the downward movement was correctly forecasted, constant fluctuations reduced the overall returns.
This occurrence arises from the design of leveraged or inverse instruments, which reset each day to achieve specified multiples relative to daily performance. As the base asset undergoes significant fluctuations, compounding effects lead long-term results to differ from straightforward multiples.
As a result, even if the base asset regains its initial price, leveraged or inverse products could still result in losses. Investors should be careful, as increased market volatility enhances the “volatility drag” phenomenon, increasing the difference between anticipated and real returns.
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