As single-stock leveraged exchange-traded funds (ETFs) are being cited as a factor heightening volatility in Korea's stock market, a securities-industry analysis on the 14th said the herd behavior that can arise from single-stock leveraged ETFs is risky but is hard to view as the main cause of volatility.
Yeom Dong-chan, an analyst at Korea Investment & Securities Co., said, "Rather than being the cause of volatility, single-stock leveraged ETFs are a factor that amplifies volatility," adding, "For intraday ups and downs that repeat during the session, it is hard to say they are due to the rebalancing demand of leveraged ETFs."
There is criticism that the recent volatility in Korea's stock market has occurred in a structure where the widening volatility of global semiconductor corporations expands volatility early in the session, and then ETF rebalancing demand amplifies volatility late in the session. In such cases, it is explained that the intraday swings are hard to view as being caused by single-stock leveraged ETFs.
Leveraged ETFs use derivatives such as futures or TRS and are ETFs that seek higher volatility than the underlying asset's daily return.
In the case of single-stock leveraged ETFs, AUM changes whenever the share price changes, so rebalancing demand arises to match 2x exposure.
For example, a 2x leveraged ETF with 10 billion won in AUM must maintain 20 billion won in exposure. If the underlying stock rises 10%, the leveraged ETF's exposure becomes 220%, up 10%. However, AUM also becomes 12 billion won, so to maintain 2x exposure the next day, exposure must be 24 billion won. In that case, a rebalancing demand of 2 billion won arises to cover the difference.
Yeom said, "If share prices rise, leveraged ETFs generate rebalancing demand to buy additional stocks and futures, and if they fall, they generate rebalancing demand to sell stocks and futures."
This rebalancing demand tends to concentrate after 3 p.m., near the close of regular trading hours on the Korea Exchange. That is because asset managers target the end-of-day leverage level based on the closing price, concentrating leveraged trades near the market close.
However, due to this structure, it is difficult to say that the recent increase in volatility is solely a problem with leveraged ETFs.
Yeom explained, "Rebalancing of leveraged ETFs often occurs late in the session, but volatility increased broadly during the session," adding, "Considering that volatility grew more in the morning than in the afternoon, it is even harder to blame leveraged ETFs."
Rather, there is analysis that the recent increase in volatility is closely linked to the expanded volatility of global semiconductor corporations.
Yeom said, "As questions are being raised about the sustainability of hyperscalers' artificial intelligence (AI) investment, Korean corporations, whose expectations for data center–related demand had been reflected, were also affected," adding, "It would be appropriate to view that the addition of leveraged ETF rebalancing demand further amplified volatility."