Just over two months ago, South Korea's financial watchdog gave the green light to a new breed of investment products: leveraged single-stock ETFs that offered double the daily returns of the nation's two largest companies, Samsung Electronics and SK Hynix. The intention was clear—lure local retail investors away from similar US-based offerings and channel capital back into the domestic market. The strategy worked, perhaps too well. In less than two months, South Korean individual investors pumped roughly $9.4 billion (14 trillion Korean won) into these funds.

But timing turned out to be a cruel joke. Both stocks had enjoyed a stellar first half of the year, fueled by AI optimism. Yet just as retail traders gained access to leverage, the global narrative shifted. Faith in artificial intelligence began to waver, and competition from Chinese chipmakers threatened SK Hynix's near-monopoly in the AI memory chip market. A tech correction followed, hammering chip stocks across the board—Micron, Intel, and even Nvidia, SK Hynix's biggest customer, felt the pain. On the worst single day, SK Hynix plunged 14.7%, and Samsung dropped 13.4%. The concentrated KOSPI index shuddered, repeatedly triggering trading halts.

Leveraged ETFs made the situation far worse. To deliver double the daily gains—and double the losses—of the underlying stocks, issuers must hold twice the value of the shares at the end of each trading day. This forces them to buy more when the stock rises and sell more when it falls, creating a vicious volatility loop that amplifies price swings in both directions. The result? Investors holding these ETFs suffered devastating losses. According to Hanyang Securities, between May 27 and July 22, Samsung and SK Hynix shares fell 15.2% and 18.4% respectively, while the leveraged ETFs tracking them crashed 40.2% and 49.4%—more than double the underlying stock declines.

Even that is not the full picture. Many assume that if a stock eventually recovers, a leveraged ETF will also bounce back. That is a dangerous misconception. Hanyang Securities simulated a scenario where the same volatility persisted for a year, with SK Hynix and Samsung returning to their original prices by year-end. Astonishingly, the leveraged ETFs would still be down 63% to 75%. This phenomenon, known as volatility decay, occurs because the funds rebalance daily to maintain exactly double the stock's return. In volatile markets, this compounding effect steadily erodes value over time, regardless of the stock's eventual recovery. The longer an investor holds, the greater the damage.

South Korea is not alone in this problem. The US market already hosts similar leveraged single-stock ETFs tracking giants like Nvidia, Tesla, and Microsoft, easily accessible through apps like Robinhood. These products have amassed $65 billion in assets as of June, with 90% of trading volume coming from retail investors. And they are producing similar carnage. For instance, a 2x leveraged Tesla ETF is down 51% over six months, even though Tesla's stock itself has fallen only 20%. A 2x Microsoft ETF is down nearly 12% year-to-date, while Microsoft is actually up about 2% after a strong recovery. That is volatility decay in action.

The US Securities and Exchange Commission (SEC) is aware of the dangers. Its Investor Advisory Committee warned in June 2023 that retail investors dominate holdings of these products and that many do not grasp the effects of compounding and daily rebalancing. The performance can diverge drastically from the underlying stock when held for longer periods. South Korea's experience confirms this, even with mandatory educational courses required before investors could access the ETFs. In the US, no such requirement exists. The SEC is currently reviewing its ETF rules, with a public comment period open until early September, explicitly covering single-stock strategies and heightened leverage. This is a pivotal moment for the regulator to act.

There is a clear distinction between risky investments and those that are structurally stacked against the investor. Leveraged single-stock ETFs fall squarely into the latter category. They expose retail investors to unnecessary risks that are hard to understand and even harder to escape. The SEC should not wait for a formal comment period to conclude. Instead, it should ban these products outright, before American retail investors suffer the same brutal losses as their South Korean counterparts. The clock is ticking, and the evidence is overwhelming.