Why a 9% Drop in the Stock Can Become a 36% Loss
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How can an underlying stock decline by 9%, while a leveraged product linked to that stock loses 36%?
On 27 May, Korea introduced single-stock leveraged ETFs and ETNs linked to companies such as Samsung Electronics and SK hynix.
These products aim to deliver up to twice the daily return of one underlying stock. Demand grew quickly after launch, prompting regulators to suspend new listings, restrict promotional activity and strengthen investor requirements.
Since 31 July, individual investors making new or additional purchases of domestic or overseas single-stock leveraged products must maintain a KRW 30 million cash deposit.
Why does a product that appears to double a stock’s return require such caution?
The answer lies in the daily reset.
Leverage applies to the daily return, not the return over the full holding period
Source: SoFi
A conventional index ETF generally invests across a diversified group of securities. A single-stock product, by contrast, is linked to the performance of one company, such as Samsung Electronics or SK hynix.
When leverage is added, the product seeks to deliver approximately twice the underlying stock’s return for each trading day.
If the stock rises by 5% during one session, the leveraged product would target a gain of roughly 10%. If the stock falls by 5%, the product would target a decline of roughly 10%.
The important point is that this exposure resets daily.
The product targets twice the daily return. It does not guarantee twice the return over a longer investment period.
How a 9% loss becomes 36%
Assume an asset starts at 100.
On the first day, it rises by 30% to 130. On the second day, it falls by 30% to 91.
The total loss is 9%.
Now consider a product targeting twice the daily return.
It rises by 60% on the first day, from 100 to 160. It then falls by 60% on the second day, leaving 64.
The underlying asset is down 9%, while the leveraged product is down 36%.
This is known as volatility drag, or negative compounding. When prices move sharply in both directions, daily resets can reduce the product’s value much faster than investors expect.
Single-stock concentration magnifies the risk
Unlike a broad index ETF, a single-stock product is tied to one company.
Its price may therefore react sharply to earnings, industry conditions, regulation, supply-chain developments and company-specific news.
In Korea, individual stocks are subject to a daily price limit of ±30%. If the underlying stock falls by 30% in one session, a product targeting twice the daily return could theoretically lose around 60%.
Actual performance may differ because of tracking error, liquidity and market conditions. Even so, the potential loss can be substantial.
Source: Alaric Securities
Market price may differ from underlying value
Source: 비즈워치
Investors should also check whether the product is trading at a premium or discount.
For an ETF, the market price is compared with its net asset value, or NAV. For an ETN, it is compared with its indicative value, or IV.
For example, if a product worth KRW 10,000 is trading at KRW 12,000, it is trading above its reference value.
An investor may lose money when that premium narrows, even if the underlying stock does not fall significantly.
During market hours, investors can also compare the traded price with iNAV for ETFs and iIV for ETNs.
Why regulation was tightened
Source: Bitpanda
The combined market capitalisation of 16 domestic single-stock leveraged products increased from KRW 4.4 trillion at launch to KRW 11.9 trillion by 15 July.
Regulators responded with measures including:
- A temporary suspension of new listings
- Restrictions on advertising and promotions
- A KRW 30 million cash deposit requirement
- Stronger premium and discount controls
- A proposed increase in the minimum trading unit
The cash deposit requirement also applies to new or additional purchases of overseas-listed single-stock leveraged products linked to companies such as Tesla or NVIDIA.
Existing positions may still be sold without meeting the requirement.
What investors should check
Single-stock leveraged products do not simply double a stock’s long-term return.
Their performance depends on:
- Daily return resets
- Volatility
- Holding period
- Single-company concentration
- Tracking error
- Premiums and discounts
Product-level information, including market price, iNAV, iIV and premium or discount, should be checked through the Korea Exchange or a securities firm’s trading platform.
The underlying company requires separate analysis.
AlphaLenz supports this process by organising company filings, financial data, news and market information. It also allows users to review the sources behind the analysis.
The product’s pricing should be checked through the exchange or brokerage platform. The company’s earnings, financial position and market context should be assessed separately.
Good investment analysis begins with understanding not only the number itself, but also what it measures and where it comes from.
AlphaLenz comparison of recent operating margin trends for NAVER and Kakao