(Bloomberg) -- Leveraged exchange-traded funds are so popular among South Korean retail investors that they own more than 20% of some of the most high-profile ones listed in the US.
Among their favorites, they hold no less than 35% of an ETF that offers a 1.5 times magnified bet on Elon Musk’s Tesla Inc., and 28% of another that provides a three-times wager on FAANG and other tech shares, based on data compiled by Bloomberg.
Not far behind those is their stake in a three-times leveraged ETF that tracks US-listed chip stocks. That fund, known among local investors by its trading code SOXL, has surged by almost 140% this year.
“So many people buy SOXL here that some buy it without even knowing that it’s three-times leverage,” said Park Eun-hye, a 35-year-old employee at a semiconductor firm in the city of Hwaesong near Seoul. It’s hard to find people here who aren’t buying the ETF, she said.
Individual Korean investors have plowed $2.3 billion into the largest US-listed leveraged and inverse ETFs this year, almost triple the amount in a similar number of funds in 2022, according to data from Korea Securities Depository compiled by Bloomberg. Their willingness to take on such volatile positions has been put down to reasons such as an insufficient pension system, high living costs and a general penchant for risky investments.
With returns and losses commonly magnified by either two or three times through the use of derivatives, these products offer investors the promise of generous returns from a small initial outlay. An inverse ETF is one that rises when the underlying index or security drops, and vice versa.
“Straight vanilla is boring — they want two or three times leverage — at least in certain sectors,” said Rebecca Sin, an equity strategist at Bloomberg Intelligence in Hong Kong. ETFs have surged in popularity in Korea thanks to the wide range on offer and also due to social media, where influencers tout the virtues of investing in such products, she said.
“Korean investors spend more than 30% of their total foreign ETF investments on leveraged products, and they are super important to some leveraged single-stock ETFs,” Sin said.
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Individual Korean investors are well known for their risk-loving behavior. Only a few years ago, the country was known as ground zero for global crypto mania, with Bitcoin trading at a so-called “kimchi premium” of more than 20% over the prevailing global price. They’ve also developed an appetite for leveraged financial products such as structured notes, debt-like products with built-in derivatives.
Father-of-two Lim DongSeob said he started buying leveraged ETFs because he was seeking higher returns from a small initial outlay with the ultimate aim of spending more time with his family.
“Regular ETFs are great investment products too, but leveraged ETFs seemed more suitable for my situation as my seed money was small,” he said. “I’m still young and my children are little, so this seemed to be the golden time for investment, and that’s why I can continue to be aggressive.”
Lim said 80% of his stock investment is currently in SOXL, whose official name is the Direxion Daily Semiconductors Bull 3x Shares.
“Investing in leveraged ETFs in the US might be a way to climb the social ladder in South Korea where there is very little class mobility,” he said.
SOXL has delivered a wild ride. The stellar gains of about 140% this year came after it tumbled 86% in 2022. Even after its recent rebound, it’s still about 70% below its record high close of December 2021.
Another leveraged ETF that’s popular with Korean retail investors — the Direxion Daily 20+ Year Treasury Bull 3x Shares, or TMF — has slumped 30% this year amid a selloff in US sovereign debt.
Forty-three-year-old James Jeong has for more than a year been buying SOXL and two other ETFs that provide leveraged bets on the Nasdaq 100 Index.
“The safest way for an ordinary salaryman like myself to become rich is to invest in the S&P 500 Index for a long time, but that takes a lot of time,” said Jeong, who asked for his Korean name not to be disclosed. “Therefore I’m trying to reduce the time that it takes to achieve financial wealth by investing in the leveraged ETF.”
Jeong said he has experienced crashes of up to 70% but has stuck to his strategy due to his firm belief. “My strategy is to keep buying without selling for at least 10 years,” he said.
Back in Hwaesong, Park said the stock market’s dramatic recovery from the pandemic selloff and her optimism on the outlook of chip companies prompted her to start buying SOXL about two years ago.
“I tend to be impatient, so I thought getting three-times returns would be better,” she said. “If there’s a drop in price, I plan to add more.”
--With assistance from Jack Wang and Sam Potter.
©2023 Bloomberg L.P.