The US Securities and Exchange Commission should ban leveraged single-stock exchange-traded funds to protect retail investors from devastating losses, following a recent market meltdown in South Korea. South Korea’s regulator approved leveraged ETFs tracking Samsung and SK Hynix just over two months ago, and retail investors poured $9.4 billion into them before a tech correction caused the underlying stocks to fall sharply, triggering volatility loops that left the leveraged ETFs down 40.2% and 49.4% respectively between May 27 and July 22. Even if the stocks recover, volatility decay means the ETFs could remain down 63% to 75% over a year. Similar products in the US have amassed $65 billion in assets, with 90% of trading from retail investors, and some are already showing steep losses despite milder moves in the underlying stocks. The SEC’s Investor Advisory Committee warned in June 2023 that many retail investors do not understand the effects of daily rebalancing, and with the SEC now reviewing its ETF rules, the author argues for an outright ban before American investors suffer the same fate.
Samsung Electronics Co Ltd
Microsoft Corporation
NVIDIA Corporation
SK Hynix Inc
Intel Corporation
Tesla Inc