Cases are piling up in which single-stock leveraged exchange-traded funds (ETFs) on Samsung Electronics and SK hynix have been designated as "investment caution" items just nine trading days after listing. In the case of Korea Investment Management's SK hynix leveraged ETF, a mishap sent the premium/discount rate soaring to 85%, and ETFs from Hana Asset Management and Kiwoom Asset Management also saw their rates widen sharply, leading to caution designations.
For the single-stock leveraged ETFs from Kiwoom and Hana Asset Management, the premium/discount widened because of a structure that invests in futures. For ETFs and regular cash equities, prices are fixed when the regular session closes at 3:30 p.m. Single-stock leveraged ETFs that mainly invest in cash equities stop at the same time as the cash price of the underlying, so the market price and indicative net asset value (iNAV) do not widen further.
However, because futures trading continues until 3:45 p.m., this time gap is seen as affecting the premium/discount. In particular, the recent sharp swings in SK hynix futures prices have increased volatility in leveraged ETFs that hold futures.
The Korea Exchange (KRX) said on the 8th that it designated three ETFs — ▲ACE SK hynix Single-Stock Leveraged ▲1Q SK hynix Futures Single-Stock Leveraged ▲KIWOOM SK hynix Futures Single-Stock Leveraged — as investment caution items. That was because the real-time premium/discount at the close corresponded to at least twice the mandatory management threshold.
In the case of ACE SK hynix Single-Stock Leveraged from Korea Investment Management, although SK hynix's share price plunged nearly 8% on the 8th, the product surged nearly 50% just before the close, sparking controversy. From 3:20 p.m. to 3:30 p.m., liquidity providers (LPs) are exempt from quote-submission obligations, and during that window, high-quote orders appear to have been executed, triggering a chain of market orders.
By contrast, the premium/discount of 1Q SK hynix Futures Single-Stock Leveraged and KIWOOM SK hynix Futures Single-Stock Leveraged widened because of their "futures-type structure."
Single-stock leveraged ETFs are broadly divided into cash-type and futures-type. The cash-type buys 100% cash equities with investment funds and buys futures contracts of the same size to create a 2x return structure. In contrast, a futures-type ETF fills all underlying positions with futures, so it can build a position with just 10%–20% margin.
The issue is the time gap. When ETFs and regular equities close at 3:30 p.m., trading stops simultaneously. But in the futures market, trading continues until 3:45 p.m. As a result, for ETFs whose underlying positions are filled with futures, the ETF price is fixed at the closing time, but futures prices continue to move in the market afterward, causing the market price and indicative net asset value (iNAV) to diverge.
An asset-management industry official said, "The widening premium/discount at the end of the session recently is unrelated to investors' transactions and is a peculiar case caused by extremely volatile SK hynix futures prices right at the close," adding, "Not only the trading volume of domestic single-stock leveraged ETFs but also volume from leveraged ETFs listed in Hong Kong is flowing in, so the quantities and futures prices are swinging too much at the cash-market close, causing the issue."
In particular, on the 8th, when SK hynix shares fell nearly 8%, not only single-stock leveraged ETFs with a futures-type structure but also cash-type ETFs had high premium/discount rates. The rate for a Hana Asset Management product was 7.29%, and the rate for Kiwoom Asset Management was 6.40%.
Asset managers say they will first do their utmost to manage quotes to prevent a recurrence. A Kiwoom Asset Management official said, "We're beyond the 40-basis-point benchmark, but there is room to improve," adding, "For now, we have asked LPs to manage quotes as best as possible."
A Hana Asset Management official also said, "From an asset manager's standpoint, the most we can do is manage quotes as tightly as possible," adding, "We are doing our utmost on that front."
Meanwhile, according to the exchange, the criteria for measuring the premium/discount apply uniformly to all ETFs, so there are no separate thresholds based on product structure or characteristics.