The ‘single-stock leveraged exchange-traded funds (ETFs)’ that allow up to twice the capital to be invested in Samsung Electronics and SK hynix shares have reached a turning point less than two months after launch.

This is because on the 16th, the financial authorities tightened investment requirements. For now, the launch of new ETFs based on stocks other than ‘Sam-Nix’ will be halted. The margin deposit required at brokerages will rise from 10 million won that could include stocks and cash to 30 million won in cash only. The minimum trading unit will expand from 1 share to 20 shares. The higher margin takes effect in August, and the higher minimum order unit in November.

Why? Because concerns arose that leveraged ETFs were widening volatility, in other words the size of price swings, and undermining market integrity, so the threshold was raised.

In fact, since leveraged ETFs were launched on May 27, many individual investors likely felt dizzy at the unbelievable volatility. Over the 36 trading days in that span, the average intraday volatility came to 5.46%. On average, prices swung ‘up and down’ more than 5% a day. During this period there were 19 sidecar triggers on the KOSPI (9 buy, 10 sell), and more than half of this year total of 37 were concentrated in this short window.

It is understandable that the government hurried out a patch. The question is whether it will really work.

This week, [What is the Economy] looks at how much these measures that raise the bar on leveraged investing can curb the market’s ‘choppiness’.

“Will it have an effect? How is it different from forcing people to buy at least 20 shares?”

“More people than expected do not have 30 million won. It may have an effect.”

As soon as the measures were announced, arguments flew on the stock-investing board of the office-worker online community ‘Blind’. According to the Korea Exchange, over the past month a net 7.3364 trillion won flowed into 16 single-stock leveraged and inverse products, and a large part of that likely came from retail investors. Assessments differ on whether the new patch will cool retail sentiment.

Those who see little effect argue, “This will not stop the hot risk appetite!” One poster said, “Do you think individuals will stop using leverage? They will borrow even more. A makeshift measure that will not work.”

On the other hand, some take a positive view. One poster wrote, “If you bring 30 million won (as margin) and then use 10 million won (of that) for 2x leverage, it is more stable to buy the underlying shares with the remaining 20 million won. Flows will surely decline.” With the minimum deposit raised from 10 million to 30 million won, buying leverage ceases to make sense for amounts at or below 60 million won, which is twice 30 million.

Experts are similarly divided. A senior executive at a securities firm told the Kyunghyang Shinmun on the 17th, “The stock market is basically a place where people with money act on their greed,” adding, “If you ask whether the higher hurdle will fundamentally block those with money, probably not.” He added, “The government has done its best within the measures it can take, but this alone will not be enough to reduce volatility.”

By contrast, Lee Hyo-seop, a senior research fellow at the Korea Capital Market Institute, said that “speculative trading demand will drop sharply,” citing precedents where raising equity-linked warrant (ELW) or futures and options margins had large effects. He also said, “Since accounts under 30 million won make up the vast majority, the threshold effect will be large.”

He also dismissed concerns that expanding the trading unit to 20 shares would ‘instead fuel over-investment’, countering, “There are research findings that the more single-share trades there are, the more speculative trading increases.”

Some investors complain that the regulations are more about ‘restricting investment opportunities’ than ‘stabilizing the market’. The argument is that the government is ‘kicking away the ladder’ that could offer a chance to make big money. On Blind, there are many gripes such as, “If I want to buy, why does the state step in to block it?” and “It seems the government kicks away every ladder it can.”

Wait, how do leveraged ETFs amplify market volatility?

Let us look into the structure of leveraged ETFs.

A leveraged ETF resets to its target multiple (2x) each day based on the closing price. For example, consider a 2x leveraged ETF with AUM of 10 billion won; the actual stock holdings total 20 billion won, twice the AUM.

If the underlying rises 10% that day, the stock holdings increase from 20 billion won to 22 billion won, and AUM from 10 billion won to 12 billion won. To maintain the principle of holding stocks worth twice the AUM the next day, the position should be 24 billion won, which is twice 12 billion. Since it is already 22 billion, the fund needs to buy an additional 2 billion won.

Conversely, if the underlying falls, the ETF must sell accordingly. Buying more on up days and selling more on down days amplifies the original up and down moves.

Even so, experts say this mechanism is only ‘ancillary’ and cannot be the main factor behind the recent extreme swings in the KOSPI. The senior securities executive said, “In the United States there is even a 3x Tesla ETF, but the impact Tesla has on the entire Nasdaq is not that large.”

The fundamental issue is the doubt surrounding semiconductor stocks. As single-stock leveraged ETFs have grown to roughly 60% of the combined market capitalization of the two underlying names, Samsung Electronics and SK hynix, fear of a ‘peak-out (decline after a peak)’ in semiconductors is the core.

Lee also said, “Global concentration in semiconductors, net selling by foreigners, concern about rate hikes, and geopolitical risks are bigger variables.”

In a recent report, Yeom Dong-chan of Korea Investment & Securities explained that leveraged ETFs “are structured to amplify existing trends, not to reverse intraday trends.” Rebalancing is carried out to match the “closing price,” but lately KOSPI volatility has expanded more in the morning than in the afternoon, he noted.

Yeom added, “The recent increase in volatility is rather the result of questions about the sustainability of artificial intelligence (AI) investment, which has also affected Korean companies.”

Overnight, the Philadelphia Semiconductor Index in the United States also plunged 4.3%, and SanDisk fell 12.6%. SK hynix ADR fell 9.0% the previous day and slid another 13.69% that day.

The government may have applied the brakes to domestic leveraged ETFs that acted as an ‘amplifier’ for the KOSPI, but it cannot control the fundamentals that shake the market, namely global semiconductor demand and prices.

The domestic market is closed on the 17th for a holiday. The impact of the government measures on leveraged ETFs, and where global semiconductor sentiment pulls the local market, will likely become clear when trading resumes on Monday the 20th.