Koreas 10-trillion-won leveraged ETF myth exposes a broken incentive structure

The 10-trillion-won claim fell apart. The incentive problem did not.

In June, Lee Chan-jin, head of South Korea’s Financial Supervisory Service, warned that securities firms would pocket between 5 trillion and 10 trillion won in commissions from single-stock leveraged ETFs. The math was simple if aggressive: with daily turnover rates reaching 200 percent, the volume alone suggestedastronomical fee income.

By August, the numbers told a different story. Member of Parliament Kim Jae-seop obtained data from the Korea Federation of Securities Industry showing that from May 27 to July 31, securities firms collected roughly 93.1 billion won in execution fees from these products. That is less than one percent of Lee’s lower bound. It does not even include the cost of liquidity providers or the education tax levied on every trade.

The gap between the supervisor’s projection and the actual figure is not merely a calculation error. It is evidence of a product whose economics benefited someone, just not nearly as much as the public narrative suggested.

The real damage was structural, not statistical

Single-stock leveraged ETFs in Korea promise two times the daily return of an individual stock, most prominently Samsung Electronics. When Samsung surged in mid-2025, these products attracted enormous retail attention. But the KOSPI, South Korea’s benchmark index, was simultaneously sliding. Holders of Samsung-leveraged ETFs experienced something paradoxical: their product rose sharply while the broader market they were implicitly betting on fell apart.

This divergence created a structural trap. Retail investors buying leveraged ETFs during a single-stock rally were not making a broad-market bet. They were taking concentrated, compounded directional exposure to one company while the index they likely assumed was stable drifted lower. The products’ daily rebalancing mechanism meant that volatility decay compounded against long-term holders. Those who held through the transition from boom to uncertainty absorbed losses that the headline leverage factor never predicted.

The financial authorities noticed. They raised base deposit requirements for these products, which caused trading volume to collapse to less than one-tenth of its June peak within days. Commissions fell with it. The premium on the product – the gap between net asset value and market price – was already being squeezed, with regulators narrowing the allowable deviation from 3 percent to 2 percent starting in August.

Liquidity providers found themselves squeezed too

A securities firm executive told InvestChosun that the repeated pressure to compress the deviation rate meant liquidity providers had to intervene more frequently, but the spread – their actual source of profit – had become too thin to sustain the business model comfortably.

That detail matters. LPs are not distant intermediaries. They are typically the same securities firms selling these products to retail clients. Their revenue comes from the bid-ask spread on every transaction. When regulators force that spread narrower while turnover remains high, the LP side of the business becomes marginally profitable at best, and potentially loss-making once the education tax and staffing costs are factored in.

This is the hidden architecture of the problem. The public debate focused on commissions. The actual economic injury may have been distributed differently – to LPs absorbing wider spreads, to retail investors enduring volatility decay, to the firms themselves catching heat from both sides.

Brokers defend themselves with a plausible claim

Securities firms are pushing back on the narrative that single-stock leveraged ETFs were a windfall. Two major points stand out.

First, the 93.1 billion won in fees represents less than 4 percent of the 2.415 trillion won in execution commissions earned by Korea Investment, Mirae Asset, NH Investment & Securities, Samsung Securities, and Kiwoom Securities combined in the second quarter. Brokers argue that the broader market rally drove most of their earnings, not this single product category.

Second, several executives suggested that removing leveraged ETFs from the market would not have eliminated the underlying trading activity. Clients would have moved to other products. Attribution is therefore difficult. Whether this argument absolves the firms depends on what standard you apply: legal responsibility or moral hazard. The products were legal. Their design encouraged turnover. That distinction matters less to retail investors who lost money than it does to regulators drafting rules.

What happens next

The issue is heading to a National Assembly investigation in the coming months. The “securities firms grew fat while retail investors bled” frame is likely to dominate the political discourse, regardless of whether the 10-trillion-won figure held up. It did not. But the underlying product design flaw remains.

Regulators have already taken the most immediate step: raising capital requirements and compressing allowable deviation rates. These measures slow trading and protect investors from excessive premiums. They do not address the fundamental mismatch that arises when a single-stock leveraged product is marketed as a broad-market opportunity or when its compounding mechanics are misunderstood by the average buyer.

The lesson for other markets with similar products – Japan, Taiwan, the United States – is straightforward. Daily-rebalanced leveraged ETFs on single stocks create perverse incentives for both distributors and retailers. The distributors profit from volume. The retailers profit only if they understand compounding decay and time their entry and exit precisely. Most do not. That asymmetry is not unique to Korea, but the scale of the retail rush here made the consequences especially visible.

The 10-trillion-won claim was wrong. The regulatory response it triggered was not. Whether it goes far enough remains to be seen.