Single-stock leveraged exchange-traded funds (ETFs) for Samsung Electronics and SK hynix are sucking in market money at a blistering pace right after launch. With turnover nearing 37 trillion won just four days after listing, an odd situation unfolded in which even existing semiconductor ETFs failed to keep up with the explosive rally centered on the two stocks. As short-selling turnover, stock lending balances, and margin loan balances all hit record highs at once, concern is peaking over crowding into large-cap semiconductor stocks and overheated investing.
According to the Korea Exchange (KRX) on the 3rd, the combined turnover of 16 single-stock leveraged and inverse ETFs for Samsung Electronics and SK hynix reached about 36.9245 trillion won through on the 1st since listing. Funds from individual investors also poured in. TIGER SK hynix Single-Stock Leverage logged 1.4732 trillion won in net purchases by individuals over the same period, ranking No. 1 in individual net buying across all individual stocks and ETFs listed on the domestic market.
As investment demand flocked to single-stock leveraged ETFs, existing diversified semiconductor ETFs showed relatively sluggish moves. In fact, KODEX Semiconductor Leverage and TIGER Semiconductor TOP10 Leverage both issued premium/discount breach disclosures as their deviations widened sharply near the close on the 27th of last month, when the single-stock leveraged ETFs were listed.
At the time, Samsung Electronics and SK hynix rose 2.68% and 9.31%, respectively, but DB HiTek (-8.39%), HANMI Semiconductor (-3.04%), and EO Technics (-5.85%), which have high weights in the ETFs, all weakened. Even within the semiconductor sector, the performance gap between large caps and small and mid-caps widened sharply, limiting the results of existing diversified semiconductor ETFs. It is also seen that just before the close, money moved into single-stock ETFs, leading to the widening premium/discount.
The tilt toward large caps sparked by the launch of single-stock leveraged ETFs is spreading into marketwide overheating. On the 29th of last month, KOSPI short-selling turnover was 5.327 trillion won, the highest level since short selling fully resumed in March last year. Stock lending balances also hit an all-time high at 190.9574 trillion won as of the 1st.
The scale of so-called "debt-fueled investing" also climbed to an all-time high. According to the Korea Financial Investment Association, as of the 29th, margin credit balances stood at 38.0227 trillion won. Over the same period, margin loans in the main board rose to 28.0245 trillion won, setting a new record high.
Brokerages warn that the larger single-stock leveraged ETFs grow, the more the share-price volatility of the underlying Samsung Electronics and SK hynix could be amplified. Leveraged ETFs must execute large-scale rebalancing transactions right before the close to match the daily return multiple. Because they have to buy more when prices rise and sell more when prices fall, a structural limitation, market swings could become larger.
In particular, because Samsung Electronics and SK hynix account for an overwhelming share of the domestic market, as related ETF assets grow, not only existing diversified semiconductor ETFs but also the entire cash market's supply-demand ecosystem could be shaken. With crowding into large-cap semiconductor stocks at an extreme, single-stock leveraged ETFs could act as a trigger for volatility, critics say.
There is also an ever-present risk of investor losses from widening premiums/discounts. In the domestic market, liquidity providers (LPs) are not obligated to submit quotes right after the open and just before the close. During these windows, ETF market prices are relatively more likely to form above or below actual net asset value (NAV). In particular, the greater the price volatility of leveraged products, the higher the risk of a widening premium/discount, raising concern that investors could end up buying above or selling below intrinsic value.
Kim Jin-young, a researcher at Kiwoom Securities, said, "Single-stock leveraged ETFs have a structure that readjusts returns daily, which can further increase the share-price volatility of the underlying assets," and added, "If the process of prices rising and falling repeats, investors can incur losses even if the price ultimately returns to the same level, so it is preferable to use them as a short-term trading tool rather than for long-term investing."