South Korea's Leveraged ETF Frenzy Cools as Simulation Trading Deters Retail Investors, Trading Volume Plummets 96%

A cumbersome simulation trading course has become an effective tool for South Korea to curb the investment frenzy in high-risk financial products, which previously caused severe volatility in the country's $4.3 trillion stock market.

Leveraged exchange-traded funds (ETFs) that track double the daily returns of Samsung Electronics (005930KS) and SK Hynix (000660KS) have shrunk to just 4% of their June peak trading volume and may see their first monthly net outflow of capital.

The key to suppressing demand lies in regulators tightening rules consecutively. The latest measure requires investors to complete a five-day simulation trading course, which involves downloading a program that only supports Windows systems onto a personal computer and spending at least one hour each day using virtual funds to familiarize themselves with leveraged trading operations and associated risks.

The rule took effect on August 19, and several South Korean retail investors interviewed said the entire process was too cumbersome to complete.

Kim Jung-hoon, a 41-year-old retail investor living in Gyeonggi Province outside Seoul, said his first reaction upon hearing about the mandatory simulation trading was that he simply wouldn't attempt it because "it's just too troublesome."

"The course sounds long, and you have to download the program onto a PC," Kim said. "I can't install external software on my company computer, and bringing another laptop to work every day doesn't seem easy."

The simulation trading course is one of a series of restrictions introduced by South Korean regulators since July to reduce investor appetite for leveraged ETFs linked to Samsung Electronics and SK Hynix. These two chipmakers dominate the global AI supply chain. Previous tightening measures included raising the minimum margin requirement.

These single-stock ETFs were launched in May, initially aiming to attract retail capital back into the South Korean stock market, but quickly became a political hot potato. At their peak trading activity, the combined trading volume of these leveraged products and the two chipmakers' stocks accounted for over 80% of the entire market, triggering severe price swings.

The simulation trading system provides investors with 100 million won (approximately $72,900) in virtual funds to personally experience the risks of trading high-risk financial products, including witnessing so-called "volatility decay," where leveraged products' returns may gradually erode over time.

Another investor surnamed Lee said he met all other requirements, including depositing the minimum 30 million won margin, but ultimately got stuck on the simulation trading course.

"You have to download a program, and there's a minimum usage time requirement," he said. He also had to register a new account, so he ultimately gave up. "I just closed it right there."

The Korea Exchange declined to disclose the number of downloads of the program or the number of investors who attempted to use the simulation trading system. It also stated it has no plans to launch a mobile platform.

According to data compiled by Bloomberg Intelligence on Seoul-listed products, single-stock ETFs linked to Samsung Electronics and SK Hynix have collectively seen about $1 billion withdrawn since August, potentially marking their first monthly net outflow.

As of August 27, the combined assets under management of these ETFs had shrunk to $500 million, down sharply from the peak of $1.14 billion at the end of June. This contraction has also been influenced by multiple global tech stock sell-offs, as market concerns grow over excessive spending in the AI industry and its commercialization prospects.

Rebecca Sin, an analyst at Bloomberg Intelligence, said capital outflows may continue in the short term as regulators continue to tighten rules. South Korea's stance toward these products has shifted from support to active suppression.

Although the rapid contraction in trading may frustrate existing investors hoping to exit at higher prices, it has helped stabilize the market. The volatility indicator for South Korea's benchmark index (KOSPI) has dropped to around 50, a four-month low, far below the peak of 97 at the end of June.

South Korea's benchmark stock index is still up 61% year-to-date but is 25% below the record high it reached two months ago.

A 39-year-old retail investor said the fading allure of AI-themed investments has made him less interested in trading leveraged ETFs. "When AI or the memory industry isn't performing well, I don't want to jump through so many regulatory hoops just to trade. If the market were much better and I were confident I could profit from these trades, then I'd be willing to complete all the procedures."