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South Koreans wanting to pour money into risky investment products will first have to watch a training video as regulators strengthen oversight of an army of retail traders known for their aggressive strategies and tolerance for volatility.
From Monday, brokerages will automatically block investors wanting to put their funds into leveraged or inverse ETFs and who cannot provide the certification number given to those who have completed the one-hour online training.
The training focuses on the structure of leveraged ETFs, the cost of hedging and the compounding effect that can magnify gains and losses. Those investing in derivative products overseas will have to do a three-hour mock trading session.
The training, an expansion of regulations governing domestic trading, follows a record surge of Korean money into US equities, up more than 50 per cent this year to a record $161bn at the end of November, according to the Korea Securities Depository. It is unclear how much Korean money has gone into ETFs, though anecdotal evidence suggests it is substantial.
“Korean retail investors have piled into the US stock market recently, especially for leveraged ETFs, for quick, high returns without acknowledging the risks. These are the minimum safeguards for these investors,” said an official at the Financial Supervisory Service.
“They can make bigger profits from these leveraged products but also suffer huge losses. By making them think about the risks one more time, we believe the online training will help reduce their ETF exposure.”
The watchdog said “extra caution” was needed as high price volatility and complex structures meant losses could snowball. Korean retail investors had lost more than $300mn annually from foreign options and futures trading for the past five years, the watchdog said.
It also warned local financial companies to refrain from aggressive marketing to lure new investors. After an investigation last year, the FSS found that some asset managers promoted ETFs as risk-free products with guaranteed returns.
South Korean amateur investors are known for their aggressive trading strategies and high-risk tolerance.
“They have a short investment horizon and tend to love trend following, [they are] sensitive to price swings,” said Jongmin Shim, Korea equity strategist at CLSA.
“When the upward direction is set, you can make high returns quickly but these leveraged products also mean that you can fall into hell when the direction is reversed.”
It is unclear whether the training courses will cool enthusiasm for leveraged US ETFs, seen by young people as a quick way to make money to cope with the ever-rising cost of living.
Kim Joon-won, a 24-year-old university student in Seoul, invested about Won10mn ($6,791) in April in SOXL, a leveraged ETF tracking US semiconductor stocks, and made a 200 per cent profit in just three months.
“I plan to double my bet on the ETF this time,” he said. “You can make a lot of money by buying it when the market goes into a panic and selling it later when the market recovers. But I am also supportive of any educational session about the risks.”
