South Korean retail investors’ voracious appetite for leveraged exchange-traded funds listed overseas has prompted the nation’s regulators to tighten rules for buyers of these high-risk products.
Come Dec. 15, local investors will have to complete an hour-long mandatory online training before investing in leveraged or inverse exchange-traded products listed in foreign markets, the Financial Supervisory Service said in a statement on Sunday. Those seeking to buy derivatives products abroad will have to go through a mock-trading program lasting at least three hours, in addition to the online course.
The moves will bring regulations for investing in these products abroad in line with those for locally listed ones.
Known for their penchant for risk-taking, individual Korean investors have been piling into leveraged ETFs, particularly US-listed products that offer exposure to high-flying tech stocks. While the explosive growth of leveraged ETFs has been a global phenomenon, few countries match the frenzy seen in Korea, where investing overseas is seen as a quick and easy way to create wealth.
The FSS’s move comes as retail investors’ direct investment in US stocks and ETFs has hit records this year. They added $6.9 billion in October alone, an all-time monthly high in depository data going back to 2011.
“The new policy will help individual investors acknowledge some of the most basic aspects of investing in those leveraged products such as their compounding effects and strategies,” said Bora Kim, head of AC strategy at Leverage Shares Plc. “It will address what Korean investors have been ignoring and could have some impact on risk-neutral retail investors that have not fully understood their risks. But the overall appetite is not expected to change.”
The stricter rules confirm Bloomberg’s report in March on policy considerations to curb risky overseas investments.
Leveraged ETFs amplify the returns and the losses investors can get by directly buying stocks. An inverse ETF is one that rises when the underlying index or security drops, and vice versa.
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