Exchange-traded funds (ETFs) that concentrate investment in leading semiconductor stocks such as Samsung Electronics and SK hynix are growing explosively, but side effects from "overshooting" are cropping up as liquidity providers (LPs) slack on quote management in the early and late minutes of trading. As market volatility spikes, cases are mounting of individual investors buying at prices higher than intrinsic value, prompting caution.
According to the financial investment industry on the 12th, Shinhan Asset Management's "SOL AI Semiconductor TOP2 Plus" surpassed 1 trillion won in net worth on the 4th, joining the ranks of mega ETFs. But when the market surged on the 6th to the point that a temporary halt of KOSPI program buy quotes (buy-side sidecar) was triggered, concerns about management efficiency surfaced.
After the open that day, the SOL AI Semiconductor TOP2 Plus ETF jumped 21.3% in the first minute, but two minutes later its gain had narrowed to 5.5%.
On the same day, Mirae Asset Global Investments' "TIGER 200 IT Leverage" also saw buying swarm in early, producing a similar gap in quotes and a sharp price spike. For about the first minute after the open, TIGER 200 IT Leverage traded at a price 29.8% above the previous close, but five minutes later the increase had eased to 16.3%.
Both ETFs heavily weight major semiconductor corporations. As of the 6th, the components and weights held by SOL AI Semiconductor TOP2 Plus were ▲SK hynix 24.6% ▲SK Square 19.4% ▲Samsung Electronics 18.9%, among others. Based on a 100% weight, TIGER 200 IT Leverage held ▲SK hynix 20.3% ▲SK Square 18.6% ▲Samsung Electronics 16.8%, among others. For roughly the first three minutes after the open that day, Samsung Electronics rose 8.5% from the previous close, SK hynix 12.2%, and SK Square 20.9%.
A person at an asset management company said, "On the 6th, domestic stock trading volume surged to the point that some securities firms' systems became unstable," adding, "As SK Square, a major holding, entered a volatility interruption (VI), it became difficult to derive a fair price, and quote management for ETFs that hold a lot of this stock was not properly conducted early in the session."
The person added, "Another reason was that, as buying concentrated early in the session all at once, the LP's inventory itself ran dry."
The domestic ETF market has undergone the following generational shifts. First-generation funds are market index-tracking ETFs, represented by KODEX 200 and KODEX Nasdaq. Second-generation funds are sector-type ETFs by industry, such as KODEX Semiconductors and KODEX securities. Third-generation funds are divided into concentrated investments in specific core stocks or covered-call strategy ETFs.
The financial investment industry notes that as the nature of ETFs with high weights in particular stocks coincides with a rush of orders early in the session, LPs' capacity to respond is reaching its limit. Among investors, complaints are emerging that a decoupling between the underlying asset and ETF prices is leading to losses.
On stock-related communities, some said, "On the 6th, compared with the gains in Samjeon (Samsung Electronics), Nix (SK hynix), and SK Square, the related ETFs' returns and divergence rates were severe," and, "Investors who bought at market prices early in the session that day caught the top."
A Shinhan Asset Management official said the firm would use this bout of buying-driven, temporary overheating to strengthen its control framework.
A Shinhan Asset Management official said, "Before the market opens, we will check LP inventory in advance and increase the number of main LP securities firms to prepare for system errors at particular firms," adding, "Even though, under exchange rules, the first five minutes after the open and the last 10 minutes before the close are quote-submission exemption periods, we will mobilize human infrastructure to strengthen oversight."
The financial investment industry analyzed that if Korea's ballooning ETF market fails to build a robust management system, it will struggle to win investor trust.
A person in the financial investment industry explained, "In the first five minutes of trading, when price volatility is high, and the last 10 minutes before the close, LP quote supply is often not smooth, and prices can become distorted," adding, "During these windows, a practical approach is to place limit orders by checking the real-time indicative net asset value (iNAV) and specifying a price, rather than buying at market."
The person warned, "Soon, ETFs that double-track the share price of a specific stock, such as single-stock leveraged ETFs, are set to launch, so buying concentration will intensify further."
According to the Korea Exchange (KRX), in the first quarter of this year there were 1,359 disclosures of ETF divergence exceeding the threshold, an 88% surge from a year earlier.