South Korea to Allow Single-Stock Leveraged ETFs, With Listings Expected From May

 
South Korea will allow high-risk exchange-traded funds that concentrate on a single stock, easing product-structure limits that had been tighter than in overseas markets while strengthening investor safeguards.
 
The Financial Services Commission said it approved an amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act at a Cabinet meeting on the 21st, allowing the introduction of single-stock leveraged ETFs. The amendment will be promulgated and take effect on the 28th, and after related rules are updated, single-stock leveraged ETFs are expected to be listed in the domestic market as early as May 22.
 
The revision permits ETF and ETN products based on a single stock, which had not been allowed. Under previous diversification rules, exposure to a specific stock was capped at 30%, but the ceiling will be expanded to 100%, enabling products that effectively concentrate on one name. Limits on risk-assessed exposure tied to price moves will also be raised to as much as 200% of total assets, allowing leverage and inverse designs of up to about plus or minus two times.
 
Single-stock ETFs are expected to be introduced first using large, heavily traded domestic blue chips as underlying assets, including Samsung Electronics and SK hynix, where market capitalization, trading volume and derivatives-market stability are considered secured. The change also lays groundwork for more strategy-based products, including covered-call ETFs.
 
Separately, through revisions to Korea Exchange rules, if an underlying stock is suspended from trading or delisted, the related ETF or ETN will also be suspended or delisted.
 
The FSC said the overhaul is intended to narrow regulatory gaps with overseas-listed ETFs, curb capital outflows and strengthen the competitiveness of South Korea’s ETF market. Single-stock ETFs are already traded in markets including the United States and Hong Kong, and South Korean investors have been investing in such overseas products.
 
With risks higher, authorities said investor protections will be significantly strengthened. For single-stock leveraged and inverse products, investors must complete an additional hour of advanced training on top of the existing one-hour pre-education requirement. The course includes a pre-assessment and checks, quizzes and a checklist covering leverage effects, negative compounding effects and tracking-difference risks. Authorities will also apply a 10 million won minimum deposit requirement to both domestically and overseas-listed products, and require product names to clearly indicate the structure using terms such as “single-stock” and “leverage·inverse,” rather than simply “ETF.”
 
An FSC official said, “Single-stock leveraged ETF products, unlike general products, have unique price structures and risk factors,” and urged investors to pay close attention to leverage effects and negative compounding effects and to invest responsibly within their capacity to absorb losses.