Leveraged ETFs are not new, but they are all over the news as South Korean regulators express regret about allowing their listing. This while the market has doubled so far in 2026 we covered the vanilla ETF options here.
A regulator calling their own approval a failure. Let’s dig in.
What’s a leveraged ETF?
Basically it moves faster than the underlying share it tracks. Usually the leverage is 2x, or in some cases 3x. So as a share rises the ETF will rise 2x or 3x the rate of the share.
There are also inverse leveraged ETFs that will rise as the share falls (or fall as it rises), again leveraged so that move is amplified.
What they don’t do is hold 2x the number of shares. They use derivatives to enhance the return. This is why they rebalance at the end of every trading session: if the stock has risen, they’ll be net buyers; if it’s fallen, they’re net sellers.
This “buy high, sell low,” forced on the fund every day by the daily reset, is the engine of both the compounding and the decay.
Do they work?
Not really.
The key point is that they only leverage the daily move. So the share moves 3% and a 2x leveraged ETF will move 6%. But over multiple days the returns compound off a reset base, and the fund suffers from volatility decay.
Volatility decay is the real issue. It’s neither a fee nor a tracking error, but it is the gap that opens between the leveraged ETF and the underlying share.
Here’s an example:
The underlying goes nowhere, but you lose money.
A stock at R100 falls 10% to R90, then rises 11.1% back to R100. The stock is flat. The 2x ETF falls 20% to R80, then rises 22.2% to R97.78. The stock is unchanged yet the leveraged fund is down 2.22%. That 2.22% is volatility decay.
Over time that volatility decay adds up.
After a down day it’s over-leveraged, so it sells (selling after the price fell). Locking in a bit of loss on every reversal is the mechanical source of the decay — and, at scale, those rebalancing flows can move the underlying stock itself.
A leveraged ETF requires a stock to go up and in a fairly straight line; if it instead chops sideways, you can lose money even when the stock itself is flat. The more volatile the stock, the faster you bleed.
What happened in South Korea?
Back on 27 May the regulator allowed leveraged ETFs — 2x daily exposure to Samsung Electronics and SK Hynix. The stocks went straight into a retail mania and then a crash, in part due to the leveraged ETFs and their buy high, sell low.
They quickly ballooned to over $9 billion in value between them and the swings have been wild, with both experiencing 25% drawdowns in two trading days.
Samsung Electronics and SK Hynix daily chart over last moth
Goldman Sachs’ trading desk estimated a 5% market swing could trigger some $4.7bn in rebalancing flows, around an eighth of a normal day’s volume.
Ahead of the listing the Financial Supervisory Service Governor Lee Chan-jin was cautious and had warned of “extremely high potential loss risk.” He’d also imposed an extra hour of mandatory investor education (pre-assessment, quizzes, checklists on leverage effects, negative compounding and tracking-difference risk) on top of the existing requirement.
Earlier this week on Monday (22 June) he commented that “These are high-risk products” and “Despite consumer warnings, trading hasn’t cooled.” This he followed up with “Half-joking, but I should have just stayed put then, and I have a lot of regrets.”
Will they come to the JSE?
Not likely, and certainly not any time soon. These really are trading products, not long-term investment products, which is what an ETF is really designed for. Traders can make use of plenty of trading tools; they don’t need leveraged ETFs.
The rest of the world
The US dominates with over $160 billion in leveraged ETFs, accounting for around 12% of daily ETF trading. Europe is much smaller and it is mostly index leveraged ETFs rather than single stock.
Leverage on an index is less risky as indices have lower volatility, which can reduce the decay.
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At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.
