Bae Jae-kyu, CEO of Korea Investment Trust Management, urged investors to stop investing in single-stock leveraged exchange-traded funds (ETFs) through a Facebook post. The warning came as SK Hynix-based leveraged ETFs showed massive discrepancies between theoretical and actual performance during recent market volatility. Korea Investment Trust Management operates ACE Samsung Electronics and ACE SK Hynix single-stock leveraged ETFs, ranking as a top-tier asset management firm in the industry.
SK Hynix Leveraged ETF Records 47.5% Loss on 17.9% Stock Decline
Bae posted an analysis titled 'Performance Analysis of Individual Stock Leverage Inverse 2x Products' on his Facebook account, stating "I apologize for saying this as the CEO of an asset management company operating individual stock leveraged ETFs." According to data attached to his post, SK Hynix stock declined 17.9% from 2,243,000 won on May 27 to 1,842,000 won on present date. During the same period, the SK Hynix single-stock leveraged ETF with the largest trading volume and assets under management (AUM) recorded a 47.5% loss. The theoretical loss based on simple 2x multiplier of the underlying stock decline was 35.8%, but actual losses exceeded this by 11.7 percentage points.
Inverse ETF Posts 31.1% Loss Despite Correct Directional Bet
The SK Hynix single-stock inverse ETF theoretically should have gained 35.8% from the underlying stock's decline, but instead recorded a 31.1% loss. The gap between theoretical return and actual performance reached 66.9 percentage points. Despite correctly predicting the stock's downward direction, returns were eroded during frequent price fluctuations.
Bae stated, "The conclusion is not to invest in individual stock leverage and inverse 2x ETFs. Even if the original stock price returns to its original position over time, the ETF price is unlikely to return to its original position." He added, "Especially when volatility in the underlying stock is large like now, losses increase daily in this structure. Nobody predicted that volatility would become this large."
Daily Rebalancing Structure Causes Volatility Erosion Effect
This phenomenon stems from the structure of leveraged and inverse ETFs, which reset returns daily based on daily return rates. As the underlying asset experiences large price swings, compounding effects accumulate and long-term returns gradually diverge from simple multiples. Leveraged and inverse ETFs can generate losses even when the underlying asset returns to its original position. As market volatility increases, the so-called 'volatility erosion' effect also expands, requiring careful investment consideration.
FAQ
What did the Korea Investment Trust Management CEO warn about single-stock leveraged ETFs?
Bae Jae-kyu posted on Facebook urging investors to stop investing in single-stock leveraged ETFs, stating that even if the original stock price returns to its original position, the ETF price is unlikely to return to its original position due to volatility erosion effects.
How did SK Hynix leveraged and inverse ETFs perform during the stock's 17.9% decline?
The SK Hynix leveraged ETF lost 47.5% (versus theoretical 35.8% loss), while the inverse ETF lost 31.1% (versus theoretical 35.8% gain) during the period from May 27 to present when SK Hynix stock fell 17.9%.
Why do leveraged ETFs show gaps between theoretical and actual returns?
Leveraged and inverse ETFs reset returns daily based on daily return rates, causing compounding effects to accumulate as the underlying asset experiences large price swings, with the volatility erosion effect expanding as market volatility increases.
