South Korea's financial watchdog, the Financial Supervisory Service (FSS), has issued a warning regarding the extreme volatility and speculative trading in newly introduced single-stock leveraged ETFs. These ETFs, which debuted in late May, are based on underlying assets like Samsung Electronics and SK Hynix, both experiencing increased volatility due to an AI-driven rally. The FSS expressed concerns that this amplified volatility could lead to significant losses for retail investors.
The market capitalization of these single-stock leveraged ETFs more than doubled, from 4.5 trillion won ($2.95 billion) on May 27 to 9.6 trillion won by June 12. Their daily turnover rate is exceptionally high at 122.5%, significantly surpassing the 30.2% seen in other leveraged and inverse ETFs. On an average day, these products alone account for 8.3 trillion won in trading, nearly a quarter of South Korea's total ETF turnover. Margin-call liquidations have already surpassed 700 billion won this month.
Regulators are particularly worried about the outsized influence of these ETFs on the underlying stocks. According to an analyst from Leverage Shares, derivatives activity and associated hedging flows from ETFs tied to SK Hynix now account for an estimated 60% to 70% of the chipmaker’s total trading volume. This concentration and leverage have amplified market swings and prompted an emergency warning from the FSS, urging investors to avoid excessive reliance on high-risk products and for securities firms to improve risk disclosures. Goldman Sachs Group Inc.'s sales desk also noted that these products could deepen concentration and amplify volatility in the equity market.
There have already been instances of unusual market behavior; for example, on June 8, a leveraged ETF tied to SK Hynix surged 50% despite an almost 8% drop in the underlying stock. This dislocation was later attributed to a lack of liquidity in the fund house's market-making system. The FSS is consulting with asset managers, securities firms, and investment banks to discuss potential measures to address the overheated trading and mitigate risks.
