Single-stock leveraged exchange-traded funds (ETFs) for Samsung Electronics and SK hynix are sucking up market funds at a blistering pace right after launch. With turnover approaching 37 trillion won just four days after listing, even existing semiconductor ETFs failed to keep up with the explosive rally centered on the two stocks, an unusual phenomenon. As short-selling turnover, stock-lending balances, and margin financing balances all hit record highs at the same time, concerns about crowding into large-cap semiconductor stocks and overheated investing are peaking.
According to the Korea Exchange (KRX) on the 3rd, combined turnover for 16 single-stock leveraged and inverse ETFs on Samsung Electronics and SK hynix reached about 36.9245 trillion won through on the 1st since listing. Individual investors' funds also poured in. TIGER SK hynix Single-Stock Leveraged posted net purchases by individuals of 1.4732 trillion won over the same period, ranking No. 1 in net individual buying across all single stocks and ETFs listed on the domestic market.
As investment demand flocked to single-stock leveraged ETFs, existing diversified semiconductor ETFs showed relatively weak performance. In fact, KODEX Semiconductor Leveraged and TIGER Semiconductor TOP10 Leveraged both issued premium/discount exceedance disclosures side by side as their tracking errors widened sharply near the close on the 27th of last month, when single-stock leveraged ETFs were listed.
At the time, Samsung Electronics and SK hynix rose 2.68% and 9.31%, respectively, but top-weighted ETF constituents such as DB HiTek (-8.39%), HANMI Semiconductor (-3.04%), and EO Technics (-5.85%) all weakened. Even within the semiconductor sector, the performance gap between large caps and small and mid caps widened significantly, limiting the results of existing diversified semiconductor ETFs by comparison. It is interpreted that the widening premium/discount also stemmed from funds shifting into single-stock ETFs just before the close.
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, rising to the highest level since the full resumption of short selling in March last year. Stock-lending balances also hit an all-time high of 190.9574 trillion won as of the 1st.
The scale of so-called "debt-fueled investing," or "bit-too," 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 financing on the main board increased to 28.0245 trillion won, setting a new record high.
Brokerages worry that as single-stock leveraged ETFs grow in size, volatility in the underlying shares of Samsung Electronics and SK hynix could be further amplified. To match daily leveraged returns, leveraged ETFs have to execute large-scale rebalancing transactions right before the close. Because they must buy more when prices rise and sell more when prices fall, a structural limitation, market swings could intensify.
In particular, because Samsung Electronics and SK hynix carry overwhelming weight in the domestic market, as related ETF assets grow, not only existing diversified semiconductor ETFs but also the entire supply-demand ecosystem of the cash market could be shaken. With crowding into large-cap semiconductor stocks at an extreme, single-stock leveraged ETFs could act as a catalyst for volatility, observers say.
There is also a persistent risk of investor losses from widening premiums or discounts. In the domestic market, liquidity providers (LPs) are not obligated to quote immediately after the open and just before the close. During these times, ETF market prices are relatively more likely to form above or below the actual net asset value (NAV). The risk of widening premiums or discounts is especially high for leveraged products with large price swings, raising concerns that investors could buy at prices above, or sell at prices below, actual value.
Kim Jin-young, an analyst at Kiwoom Securities, said, "Single-stock leveraged ETFs have a structure that readjusts returns daily, which can further increase volatility in the underlying shares," and added, "If the process of prices rising and falling repeats, investors can lose money even if the price ultimately returns to the starting point, so it is better to use them as a short-term trading vehicle rather than for long-term investment."