South Korean retail investors are making significant forays into high-stakes US exchange-traded funds (ETFs), particularly leveraged ones, with ownership exceeding 20% in some prominent offerings. Notably, they hold more than 35% of an ETF providing a 1.5 times magnified exposure to Tesla Inc., and 28% of another offering a three-times leverage on FAANG and other tech shares. This trend underscores a growing appetite for risk among individual investors in South Korea.
Leveraged ETF Popularity
Individual Korean investors have injected $2.3 billion into the largest US-listed leveraged and inverse ETFs this year, nearly tripling the amount invested in a comparable number of funds in 2022. Leveraged ETFs allow investors to amplify returns and losses by two or three times through derivatives, making them an attractive option for those seeking substantial gains from a modest initial investment.
Reasons for the Surge
Several factors contribute to the popularity of leveraged ETFs among South Korean investors. Issues such as an inadequate pension system, high living costs, and a general inclination toward riskier investments have fueled a willingness to embrace volatile positions. The allure of potentially generous returns from leveraging, combined with the appeal of sophisticated financial products, has driven this surge.
Social Media Influence
The popularity of ETFs, particularly leveraged ones, in Korea is further amplified by influencers on social media who extol the virtues of such investments. Rebecca Sin, an equity strategist at Bloomberg Intelligence, notes that Korean investors allocate over 30% of their total foreign ETF investments to leveraged products, emphasizing their significance in the market.
Risk-Loving Behavior
South Korean investors are known for their risk-loving behavior, having previously exhibited enthusiasm for cryptocurrencies during the global crypto mania. Leveraged financial products, including structured notes with built-in derivatives, also find favor among this demographic.
Individual Investor Perspectives
Individual investors like Lim DongSeob and James Jeong express their rationale for investing in leveraged ETFs. Lim, a father of two, sees leveraged ETFs as a means to achieve higher returns with a small initial investment, allowing him more time with his family. James Jeong aims to expedite wealth accumulation by investing in leveraged ETFs, emphasizing the potential for financial mobility.
Rollercoaster Rides and Long-Term Strategies
Notably, popular leveraged ETFs like Direxion Daily Semiconductors Bull 3x Shares (SOXL) have experienced significant fluctuations, exemplified by SOXL’s 140% gain this year following an 86% tumble in 2022. Investors like James Jeong acknowledge the volatility but remain committed to long-term strategies, expecting substantial returns over time.
Societal Implications
Investing in leveraged ETFs is viewed by some as a way to climb the social ladder in South Korea, where class mobility is perceived to be limited. The allure of substantial returns and the potential for financial success prompt investors to tolerate the inherent risks associated with leveraged plays.
In conclusion, the surge in South Korean retail traders’ participation in high-stakes US ETFs, especially leveraged ones, reflects a complex interplay of financial motivations, societal factors, and the evolving landscape of retail investment behavior.
