Leveraged ETFs, particularly those tracking South Korean chipmakers SK Hynix and Samsung Electronics, are experiencing a boom in Asia, amplifying daily returns through borrowed money for a 2x, 3x, or even 5x daily multiplier. This has led to significant gains but also magnified losses, with the Hong Kong-listed CSOP SK Hynix leveraged ETF becoming the largest of its kind globally, accumulating 51.8 billion Hong Kong dollars ($6.6 billion) in assets. These products, which involve daily rebalancing trades, create a feedback loop that exacerbates market moves, increasing volatility in the KOSPI index, which saw its volatility index hit a record high of 97.99 on June 29.
The explosive growth of these single-stock leveraged ETFs, first launched in the US in 2022 and approved in South Korea in April, has drawn comparisons of the market to a "gambling den" by some critics, including an opposition leader. Trading volumes in these ETFs reached $140 billion in a single month by June 29, dwarfing ordinary stock trading. While asset managers state these products are for professional traders, many retail investors, including those new to stocks, have been drawn in by the potential for high returns, despite disclaimers about their unsuitability for buy-and-hold strategies due to expense erosion over time.
Concerns are mounting among regulators and analysts about the market impact. The Financial Services Commission in South Korea has enacted measures, including banning promotional events and discouraging new launches for single-stock leveraged ETFs. The Financial Supervisory Service admitted that approvals for these funds were "hastily prepared." Michael Green, Chief Strategist at Simplify Asset Management, noted the "incredible feedback loop" driving volatility in the semiconductor space. The daily rebalancing of these ETFs, especially for SK Hynix and Samsung (which together comprise over half of the KOSPI index and over 80% of its trading volume on some days), can create massive price swings and distort closing prices, with one analysis suggesting rebalancing flows for SK Hynix alone could exceed 20% of its average daily trading volume. As of July 9, the CSOP SK Hynix ETF had fallen nearly 50% from its peak, resulting in an $8.8 trillion won evaporation of asset value for individual investors in the Korean market over nine trading days in July, leading to calls for higher investment thresholds.
