President Lee Jae-myung has instructed the rapid promotion of institutional supplements related to single-stock leveraged exchange-traded funds (ETFs), which have recently been identified as a factor in increasing volatility in the domestic stock market.

During a briefing at the Blue House on the 15th, President Lee ordered Jung Eun-bo, Chairman of the Korea Exchange, to "quickly prepare supplementary measures," emphasizing the need for investor protection and market stabilization measures.

[Provided by Yonhapnews]

▲ Financial Supervisory Service Chief also directly mentions market concerns

Prior to the briefing, President Lee also mentioned single-stock leveraged ETFs to Financial Supervisory Service Chief Lee Chan-jin and directly conveyed concerns raised recently in the market.

President Lee said, "It seems you've been experiencing this a lot recently," pointing out the growing criticism surrounding single-stock leveraged ETFs.

In response, Chief Lee said, "As a market manager, I bear responsibility and am accepting it humbly."

Investment Association and 10 securities companies CEOs hold emergency meeting on single-stock leveraged ETFs(Photo : [Provided by Yonhapnews])

▲ Index volatility and the compound return structure of leveraged ETFs

Leveraged ETFs are derivatives designed to track twice the daily return of a baseline index. The longer the holding period, the greater the divergence in returns compared to the index due to the "volatility drag" phenomenon.

When the baseline index moves sideways or experiences ups and downs, leveraged products accumulate compounding losses through daily rebalancing processes, costs, and the application of multipliers to declines.

The core disparity experienced by investors stems from "mathematical arithmetic." If an index rises 10% and then falls 10%, the principal suffers a 1% loss, but a 2x leveraged product experiences a 20% rise followed by a 20% fall, resulting in a 4% loss of principal.

The higher the volatility, the more this gap expands exponentially, acting as a fatal asset erosion factor for long-term investors.

While leveraged ETFs are suitable for short-term directional bets, long-term holdings carry significant volatility drag and amplified loss risks.

▲ Financial authorities reconfirm regrets about institutional adoption process

Chief Lee previously expressed strong regrets regarding the introduction of single-stock leveraged ETFs during a press briefing last month.

At that time, he said, "I regret that we should have blocked it completely," essentially expressing regret about failing to sufficiently consider market volatility.

▲ Discussion on institutional improvements begins in earnest amid expanded volatility

As volatility in the domestic stock market has recently expanded, market participants have pointed out that leveraged ETFs with specific stocks such as Samsung Electronics and SK Hynix as underlying assets are one of the major factors amplifying volatility.

In response, financial authorities are reportedly intensively reviewing the necessity and direction of improvements to the single-stock leveraged ETF system through market situation check meetings.