{"id":5034,"date":"2026-08-06T12:08:44","date_gmt":"2026-08-06T12:08:44","guid":{"rendered":"https:\/\/crosscountrymovingteams.com\/?p=5034"},"modified":"2026-08-06T12:08:44","modified_gmt":"2026-08-06T12:08:44","slug":"the-sec-should-ban-the-products-behind-south-koreas-recent-market-meltdown","status":"publish","type":"post","link":"https:\/\/crosscountrymovingteams.com\/?p=5034","title":{"rendered":"The SEC should ban the products behind South Korea\u2019s recent market meltdown\u00a0"},"content":{"rendered":"
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South Korea\u2019s retail investors poured $9.4 billion (14 trillion Korean won) into these funds in less than two months. The problem was, they launched at a terrible time for the country\u2019s two star stocks. Both had seen huge gains in the first half of the year, but just as South Korea\u2019s retail buyers got access to leverage, the world began to lose its blind faith in AI, while competition from China threatened SK Hynix\u2019s near-monopoly in the AI chip market.\u00a0<\/p>\n

Read more I\u2019m a data center CEO. Communities deserve better partners,\u00a0not blanket bans<\/a><\/p>\n

This led to a correction in tech, hitting chip stocks like Micron, Intel, and SK Hynix particularly hard, as well as Nvidia \u2013 SK Hynix\u2019s biggest customer. On the worst day, SK Hynix and Samsung fell 14.7% and 13.4% respectively. This was bad enough on its own, dragging down South Korea\u2019s concentrated KOSPI index and repeatedly triggering trading stops. But the leveraged ETFs truly made the regulators rue the day the approved them.\u00a0<\/p>\n

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That\u2019s because in order to give investors double the gains and double the losses of the underlying stocks, the issuers of these leveraged ETFs have to hold twice the value of the stock at the end of each day. That means buying more as the stock rises and selling more when it falls. This creates a volatility loop, exaggerating the price moves in both directions.<\/p>\n

These wild price swings meant that investors holding leveraged ETFs were left nursing huge losses. According to a calculation by South Korea\u2019s investment firm Hanyang Securities, Samsung\u2019s and SK Hynix\u2019s shares fell 15.2% and 18.4% respectively between May 27 and July 22, while the leveraged ETFs tracking them were down 40.2% and 49.4% respectively \u2013 more than double the losses of the underlying stocks.<\/p>\n

Even that\u2019s not the worst part, though. It might seem that if you just wait out the volatility, the stock will eventually recover and you get all your money back. Unfortunately, that\u2019s not how leveraged ETFs work in a volatile market.\u00a0<\/p>\n

Hangyang Securities simulated what would happen if the same volatility carried on for a year, and found that even if SK Hynix and Samsung returned to their original price by the end of that year, the leveraged ETFs would still be down 63%-75%. In other words, even if the stocks eventually recovered, investors in these funds would be severely underwater.<\/p>\n

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That\u2019s because the ETFs don\u2019t simply track your original investment \u2013 they rebalance to give you exactly double the stock\u2019s return on any given day. That process is called volatility decay. It becomes a major issue during volatile markets \u2013 and the longer you\u2019re invested, the worse it gets. While not all leveraged ETFs do this daily rebalancing, the vast majority do.<\/p>\n

The recent volatility in South Korea\u2019s market was exactly that kind of environment, and the stories of the losses suffered by retail investors are brutal. But it\u2019s not just South Korea\u2019s problem. In fact, its leveraged ETFs were copycats of similar products that already existed in the US, tracking tech giants like Nvidia, Tesla and Microsoft \u2013 products that are available for you to buy via apps like Robinhood.\u00a0<\/p>\n

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These products amassed $65 billion in assets as of June, with 90% of trading coming from retail investors. Yet some are already nursing similar losses to those seen in Korea. For example, an ETF giving you two times the performance of Tesla is down 51% over six months, despite Tesla\u2019s stock only falling 20% over the same period. Another such ETF providing 2x exposure to Microsoft is down nearly 12% so far this year, even though Microsoft is actually up around 2% after a recent strong recovery.\u00a0<\/p>\n

Read more Is Elon Musk\u2019s master plan with SpaceX to have rockets replace planes for global cargo delivery?<\/a><\/p>\n

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That\u2019s volatility decay in action. And that\u2019s why the US securities regulator, the Securities and Exchange Commission (SEC), needs to step in to protect retail investors at home, before there\u2019s a repeat of South Korea\u2019s market meltdown.<\/p>\n

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It\u2019s not that the SEC isn\u2019t aware of the issues. Its Investor Advisory Committee found back in June 2023 that retail investors make up the vast majority of holders of these single-stock leveraged ETFs, \u201cmany buy-and-hold retail investors do not understand the potential effects of compounding and daily rebalancing\u2026 such that the performance significantly diverges from the underlying stock when held over a longer period of time\u201d.<\/p>\n

That\u2019s exactly what caught South Korean investors off guard, even with mandatory educational courses required before they could access these products. It\u2019s simply too counterintuitive. In the US, no such requirement exists at all.<\/p>\n

The SEC is now conducting a review of its ETF rules, with a public comment period open through early September, explicitly covering \u201cnovel ETFs\u201d including single-stock strategies and heightened leverage. Now is their chance to act.<\/p>\n

There are risky and volatile investments, and then there are investments that are stacked against you. These products fall squarely in the latter category. All single-stock leveraged ETFs are doing is exposing retail investors to unnecessary risks.\u00a0<\/p>\n

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So don\u2019t wait for the public to give their verdict on a product they may not fully understand \u2013 ban them outright, before America\u2019s retail investors suffer the same losses as their South Korean counterparts.<\/p>\n

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of <\/em>Fortune.<\/em><\/p>\n

Read more Third time\u2019s a charm for CDC director as Senate finally confirms Erica Schwartz as new agency head<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The SEC already knew, three years ago, that retail investors make up the vast majority of holders of single-stock leveraged ETFs.<\/p>\n","protected":false},"author":1,"featured_media":5033,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[541],"tags":[],"class_list":["post-5034","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-securities-and-exchange-commission"],"yoast_head":"\nThe SEC should ban the products behind South Korea\u2019s recent market meltdown\u00a0 - Cross Country Moving Team<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/crosscountrymovingteams.com\/?p=5034\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The SEC should ban the products behind South Korea\u2019s recent market meltdown\u00a0 - 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