Although concerns are growing that the leveraged single-stock exchange-traded funds (ETFs) for Samsung Electronics and SK hynix, listed recently, are adding to market volatility, an analysis found that actual product management has been relatively stable. However, in a market with high volatility like now, the unique "volatility drag" effect of leveraged ETFs can lead to returns far below expectations for long-term investments, so caution is advised.
According to Meritz Securities on the 7th, the net asset value (AUM) of domestic equity ETFs topped 200 trillion won this year, more than doubling from the start of the year. After the leveraged single-stock ETFs for Samsung Electronics and SK hynix were listed on May, concerns also emerged in the market that leveraged products might amplify stock market volatility.
However, Meritz Securities assessed that, contrary to market concerns, the actual premium/discount ratios of leveraged ETFs are at stable levels.
From May 27 to July 6, the average premium/discount ratio of the Samsung Electronics single-stock leveraged ETF was 0.84%, and SK hynix was 0.90%. The Korea Exchange (KRX) requires disclosure when the same-day premium/discount ratio of a leveraged ETF exceeds 1%, and both products are said to be tracking their net asset value (NAV) relatively faithfully.
Researcher Lee Sang-hyun at Meritz Securities said, "The average premium/discount ratio of domestically listed single-stock leveraged ETFs is 0.84% for Samsung Electronics and 0.90% for SK hynix, showing that leveraged ETFs are tracking their net asset value (NAV) well."
However, the issue is the structural characteristics of leveraged ETFs. To meet the target multiple each trading day, leveraged ETFs readjust exposure near the close. They have a so-called "short gamma (gamma-like)" structure, adding when prices rise and reducing when they fall, which can amplify market volatility as volatility increases.
Lee said, "The daily rebalancing of leveraged and inverse ETFs shows transaction characteristics similar to 'short gamma,' expanding exposure when prices rise and reducing it when prices fall," adding, "There are concerns it could increase market volatility and widen price swings."
However, judging by the current rebalancing size alone, it is not enough to shake the entire market.
Based on the actual asset size (AUM) of the Samsung Electronics and SK hynix single-stock leveraged ETFs and the daily price change rates, Meritz Securities estimated that the rebalancing size was 4.1% of trading value for Samsung Electronics and 5.5% for SK hynix. As a share of market capitalization, it was only 0.9% and 2.7%, respectively.
Lee said, "From a ratio perspective, it is not at a size that would affect the stock market," but added, "If such rebalancing concentrates 30 to 60 minutes before the close, the mechanical process could lead to order-flow imbalances and abnormal transactions, so a cautious approach is needed."
What securities firms are most wary of is "volatility drag." If the underlying asset moves steadily in one direction, leveraged ETFs can expect high returns, but in markets that seesaw, repeated daily rebalancing can severely damage returns.
In fact, from May 27 to July 6, Samsung Electronics shares rose 6.4%, but over the same period, the cumulative return of the 2x leveraged Samsung Electronics ETF was not 12.8% but 1.3%. Volatility accumulated during daily rebalancing, sharply lowering the expected return.
Lee analyzed, "In a period of high volatility like now, the probability of value erosion increases if leveraged ETFs are held long term," adding, "The longer the holding period and the greater the volatility, the larger the potential loss."
Lee also pointed to the recent simultaneous rise of the KOSPI 200 and the volatility index (VKOSPI), unlike in the past, as something investors should note. Lee said, "Since last year, there has been a shift to a positive correlation where index surges and VKOSPI increases occur at the same time," adding, "In an environment like now, with VKOSPI near 90, wide index swings are likely to continue for the time being." Lee added, "The more rapidly the market changes, the more leveraged ETFs should be approached with a focus on short-term trading, and long-term holding requires greater caution."