Korean retail investors flock to U.K. 3x ETPs to seek short-term high returns

NVIDIA Corp. headquarters in California, U.S. [Photo provided by Reuters-yonhap]

An increasing number of individual investors in South Korea are flocking to products that track three times the daily return of U.S. big tech companies amid growing interest in the European stock market, raising concerns that investing in the European stock market for high returns at the expense of high fees could result in large losses depending on stock price fluctuations.

According to Samsung Securities Co.’s analysis released Sunday between April 11 and May 10, its retail investors mostly net purchased British 3x short exchange-traded products (ETPs) and French luxury stocks.

Leverage Shares 3x Short Nvidia ETP Securities (NV3S) in the U.K. stock market was most sought after with investors buying 984.25 million won ($734,679). The product is designed to provide negative three times the daily return of NVIDIA Corp., a semiconductor stock listed on the U.S. stock exchange. It gained popularity among investors looking for short-term gains in anticipation of a decline in shares of NVIDIA, which produces high-performance artificial intelligence chips.

Individual investors also net purchased 121.39 million won worth of Leverage Shares 3x Short Facebook (META) ETP Securities (FB3S), which bets on the decline of the META stock. Short sales of NVIDIA and META are increasing as the two stocks have soared 99.64 percent and 89.03 percent, respectively, from early this year and are considered overpriced.

Short ETPs listed on the U.K. stock market have drawn attention as it allows individual investors to utilize short selling of individual stocks. They have attracted investments greater than regular stocks. The U.S. stock market also offers leveraged inverse products that invest in individual stocks, but there is no such product as ETPs in the U.K that provides three times the opposite return.

Investors seeking greater returns on short selling have bought U.K. ETPs although the U.S. exchange-traded funds (ETFs) offer better conditions in terms of accessibility and trading volume. This is, in fact, why domestic investors flocked to the U.K. stock market after shares of Tesla Inc. soared in 2021.

Asset management firms of these products have even started introducing strategies to increase sales in Korea. Leverage Shares PLC, a European investment management company specializing in leveraged and inverse ETPs, waived management fees for -3x Short Tesla ETP (TS3S) and -3x Short NIO ETP Securities (SNIO), which are in high demand in Korea, at the end of last year.

However, investing in 3x leveraged ETPs requires caution as the size of losses, not just returns, is larger than that of regular stocks. “Individual investors are engaging in inverse trading to target a possible decline after a recent surge in large U.S. tech stocks at the beginning of this year,” said Seo Jeong-hoon, an analyst at Samsung Securities. “Yet, they should be reminded that it is very hard to recover losses from a long-term investment in 3x inverse ETPs.”

Europe has a stock market with one of the world’s greatest levels of autonomy given to investments in high leveraged inverse products. The London Stock Exchange is the one and only bourse that lists leveraged products that track up to five times the daily return of the S&P 500 Index and the Nasdaq Index.

Given the extreme leverage, even the slightest fluctuation in the stock index leads to a huge difference in return. 5QQQ that tracks 5x the daily performance of the Nasdaq index and 5SPY that tracks 5x the leveraged product of S&P 500 rose 112% and 20% each amid a rise of the U.S. stock market from the beginning of this year.