Single-stock leveraged exchange-traded funds (ETFs) introduced by financial authorities to bring back investment funds that had flowed overseas are becoming a "volatility catalyst" shaking not only Korea's market but also the U.S. market.
Some argue that the issue lies not in the decision to introduce single-stock leveraged ETFs itself, but in a system design that set excessively strict limits on eligible underlying assets. In the United States, a wide range of single-stock leveraged ETFs backed by various stocks are listed, but in Korea the bar was raised so that only products tied to Samsung Electronics and SK hynix could launch, creating a side effect of concentrating investment demand in the two stocks.
With the two stocks already whipsawing under the influence of the semiconductor supercycle, the arrival of leveraged ETFs poured fuel on rapid price swings. The safeguards put in place by the authorities ultimately concentrated investor demand in the two names, laying the groundwork for greater market crowding.
According to Korea Securities Depository (KSD) on the 29th, during the 22 trading days from May 27 to June 26 after the listing of domestic single-stock leveraged ETFs, domestic investors' buy-settlement amount for the Hong Kong–listed SK hynix 2x leveraged ETF was $135,610,000, up 422% from the same period at the start of the year (Jan. 2 to Feb. 2). Over the same period, the buy-settlement amount for the Samsung Electronics 2x leveraged ETF also rose 194% to $73,070,000.
While it is said that investment funds gathered as these stock prices surged and plunged recently, assessments say the policy effect of repatriating overseas investment demand to the domestic market fell short of expectations. The effect on stabilizing the exchange rate was also limited. Recently, the won-dollar rate has remained around 1,540 won, still the highest level since the global financial crisis.
In Korea, trading in leveraged ETFs tracking Samsung Electronics and SK hynix has surged. According to the Korea Exchange (KRX), on the 24th, the trading value of single-stock leveraged and inverse ETFs on Samsung Electronics and SK hynix reached 19.4 trillion won, the highest since listing.
◇ Individuals bought in the U.S., too, but the market structure differed
As single-stock leveraged ETFs were blamed as the main culprit for amplifying market volatility without delivering the intended effects, the authorities pointed to individuals' speculative trading behavior. But in the United States, which introduced single-stock leveraged ETFs earlier, individuals also account for a very large share of investment in these products.
According to U.S. asset manager Direxion, about 90% of trading volume in U.S. single-stock leveraged ETFs comes from individual investors. In addition, last year trading in single-stock leveraged ETFs amounted to about 8% of total U.S. market trading volume. Even so, the phenomenon of these ETFs increasing overall market volatility has not appeared in the United States.
Rather, the differing impact of single-stock leveraged ETFs on the U.S. and Korean markets appears to be due to the number of listed names.
Park U-yeol, a researcher at Shinhan Investment & Securities, said, "There are hundreds of single-stock leveraged ETFs listed in the U.S., and it is rare for products to use only a few names with absolute index influence as underlying assets, as in Korea." He said, "Even Nvidia, a representative U.S. stock, has about an 8% weight in the S&P 500, whereas Samsung Electronics and SK hynix exert far greater influence on the KOSPI."
Cho Seung-bin, a researcher at Daishin Securities, also said, "The U.S. market is so large that the impact of a single product on the entire market is limited," adding, "In Korea, the concentration in certain stocks is so high that even the same products can deliver a bigger shock to the market."
When the authorities introduced single-stock leveraged ETFs, they strictly limited the underlying assets for reasons of market volatility and investor protection. Only when multiple conditions were all met—market cap share of at least 10%, trading volume share of at least 5%, investment-grade credit, and derivatives trading volume—could a single-stock leveraged ETF be launched. The only listed companies meeting all these conditions are Samsung Electronics and SK hynix.
In the end, analysis suggests the problem lies less with single-stock leveraged ETFs themselves than with the decision to build the market around only a few names, which amplified the issue. While "leveraged investing" demand in the U.S. is dispersed across diverse stocks, in Korea funds have concentrated in Samsung Electronics and SK hynix, making ETF rebalancing translate directly into index volatility.
◇ The paradox of allowing only two stocks: would expansion be the answer?
Some recommend gradually expanding eligible single-stock ETFs around blue chips, on the grounds that it could help disperse funds concentrated in specific names.
Researcher Park said, "The U.S. also started with blue chips and gradually expanded the list of eligible names," adding, "As seen in the recent moves to launch single-stock leveraged ETF products on Hyundai Motor and Samsung Electro-Mechanics in the U.S., gradually broadening around blue chips with ample trading volume such as Hyundai Motor or Samsung Electro-Mechanics is meaningful in terms of dispersing funds."
However, some say merely expanding the product lineup will not be enough to resolve the current volatility.
An ETF head at an asset management firm said, "Increasing the number of products could provide some dispersion, but if investors continue to prefer Samsung Electronics and SK hynix, the crowding will not change much," adding, "Fundamentally, volatility can only ease if the domestic market structure and investment demand concentrated in semiconductors are alleviated."
NH Investment & Securities recently said in a report, citing the U.S. "Magnificent Seven (M7)," that crowding in certain names tends to continue as long as earnings momentum (upward drivers) is sustained rather than valuation.
Ha Jae-seok, a researcher at NH Investment & Securities, said, "The U.S. also had a Magnificent Seven (M7) crowding phenomenon, but as long as earnings momentum continued, fund concentration persisted for a considerable period," adding, "Given the strong expectations for earnings improvement at Samsung Electronics and SK hynix, crowding of funds into semiconductors and related ETFs is likely to continue for the time being."