As the domestic stock market has shown extreme volatility recently, some note that single-stock leveraged exchange-traded funds (ETFs), which have seen a flood of funds from individual investors chasing windfalls, are turning into a boomerang shaking the KOSPI.
As KOSPI volatility expanded this month, the asset value of individual investors who bet on single-stock leveraged products evaporated by about 8.8 trillion won in nine trading days.
According to FnGuide QuantWise and Mirae Asset Securities on the 15th, a tally of the total assets under management (AUM) trend for four single-stock leveraged ETFs on Samsung Electronics and SK hynix from Mirae Asset Global Investments and Samsung Asset Management, the two powerhouses of the asset management industry, showed cumulative mark-to-market losses of 8.8337 trillion won from July 1 to 13.
Even amid a steep index plunge, individuals' strong buying kept growing. But taking a hit of more than twice the index's decline, more than 8.8 trillion won of retail investors' funds melted away from the market in nine trading days.
As of June 30, the AUM of the four Samsung Electronics and SK hynix single-stock leveraged ETF products stood at 14.3518 trillion won, but as of the 13th it had plunged 37.72% to 8.9389 trillion won.
Expanding the scope to all 14 Samsung Electronics and SK hynix single-stock leveraged ETFs listed on the domestic market, the damage is even larger. Their combined AUM fell 41.40% from 15.9349 trillion won at the end of June to 9.3386 trillion won as of the 13th.
By issue: ▲ The AUM of Samsung Electronics leveraged ETFs decreased 35.29% from 5.8195 trillion won to 3.7657 trillion won, while ▲ SK hynix leveraged ETFs, which saw bigger price swings, fell 44.91% from 10.1154 trillion won to 5.5729 trillion won, effectively halving.
Market experts say individuals' purchases of leveraged ETFs are not just about personal investment losses but are the main culprit behind volatility that distorts the KOSPI cash index itself. They note that mechanical trading in the derivatives market (futures) arising during product management is warping the market.
When an individual investor buys a leveraged ETF, the asset manager and the securities firm acting as a liquidity provider (LP) buy a large volume of futures in the derivatives market to match double the daily return. The surge in futures buying can widen the phenomenon in which the futures price exceeds the cash price, or even drive the futures index to spike.
As the price gap between futures and cash widens, program buy orders for arbitrage trades (selling futures and buying cash) from institutions and foreigners pour in. Program buying lifts large-cap KOSPI stocks, artificially pushing up the cash index.
The problem comes when the index plunges. Conversely, selling of leveraged ETFs leads to futures selling and falling futures prices, which in turn triggers program selling and exerts downward pressure that further drags down cash prices.
In particular, leveraged ETFs must carry out portfolio rebalancing trades at the close each day to match double the daily return. As a result, mechanical buy and sell orders in the futures market cluster abnormally late in the session, further amplifying index volatility near the close.
Nodong-gil, a researcher at Shinhan Investment & Securities, said, "A 2x leveraged ETF must sell more stocks in a falling market, and an inverse ETF must take on more short positions to match the increased asset size," adding, "Single-stock products concentrate supply on specific large caps rather than dispersing it, and the structure that forces more mechanical selling as prices fall is combining to deliver a major shock to the market."
An official at a domestic asset management firm said, "With a slew of leveraged products aimed at maximizing individuals' investment appetite, the phenomenon of the derivatives market shaking the cash market is intensifying," adding, "Across the Korean stock market, sharp swings driven by mechanical trading are recurring regardless of corporations' fundamentals."