[Reporter’s Notebook] The Bold Shift of Retail Investors

"The U.S. market is Koreafying." This was the title of a column posted in June last year on the website of American asset management firm Acadian by Vice President Owen Lamont. He lamented that the U.S. market is increasingly resembling the Korean market, where theme stocks dominate. Less than a year later, this lament turned into fear. The title of his most recent article, posted last month, was "The Squid Game Stock Market." He argued that, in the U.S. market, ordinary Koreans are taking enormous risks in hopes of becoming overnight millionaires, and that the bizarre and intense price swings seen in the U.S. stock market in recent years are reminiscent of the violent events depicted in Squid Game.

In fact, the aggressiveness of Korean retail investors in the U.S. market, known as "Seohak Ants," is growing day by day. In the first quarter alone, Seohak Ants showed extraordinary affection for Tesla by purchasing $2.3 billion (about 3 trillion won) worth of its shares. Now, however, their attention is shifting to leveraged ETFs. SOXL, which tracks the share prices of 30 major U.S.-listed semiconductor companies at three times leverage, and TQQQ, which tracks the Nasdaq 100 index at three times leverage, have together sold $1.2 billion (about 1.7 trillion won) worth in just the first 15 days of the second quarter, pushing Tesla out of the top spot in Seohak Ants' portfolios.

Triple leverage means exactly that: if the underlying stock price drops by 30%, the ETF you hold will fall by 90%. When the U.S. stock market was steadily rising, these products boasted overwhelming returns compared to simply holding stocks. However, in today's volatile market, investors' accounts are being wiped out. This is due to the phenomenon known as "volatility drag." For example, suppose the underlying index starts at 100 points, drops by 10% to 90 points the next day, and then rises by 11.11% the following day to return to 100 points. Since the index is back to where it started, the index fund's return is 0%. However, someone who bought a triple-leveraged ETF would see their holding drop to 70 points (-30%) on the second day. Even with a 33.33% rebound on the third day, the value would only recover to 93 points.

The cost of holding these products is also significant. High-multiplier leveraged ETFs are mostly structured through swap contracts with global investment banks. The management company pays a borrowing rate in exchange for guaranteeing three times the return of the underlying asset. Investment banks charge an additional premium for taking on this risk, and these costs are passed directly to investors. According to a report by the International Finance Center, the annual cost of a triple-leveraged ETF is estimated at 12%. If you think only about the ETF management fee as the cost, you could be in for an unpleasant surprise.

According to the Bank of Korea, as of March 18, Korean investors accounted for nearly 40% of the holdings in the Tesla 2x Leveraged ETF (TSLL). If TSLL were a company, it would essentially be a Korean subsidiary. There is a world of difference between buying a product with a clear understanding of its risks and simply following others. Do not forget the Bank of Korea's warning: "Seohak Ants, now is the time for diversification."