Leveraged Chip ETFs Fuel Volatility in South Korea's Stock Market

Single-stock leveraged ETFs linked to Samsung and SK hynix are amplifying volatility in South Korea's stock market. After an AI-chip rally reversal, the ETFs' daily rebalancing mechanism is reinforcing price swings, prompting regulatory scrutiny.

Single-stock leveraged exchange-traded funds (ETFs) linked to Samsung Electronics and SK hynix have come under scrutiny for amplifying volatility in South Korea's stock market after the reversal of the artificial intelligence (AI)-driven chip rally, according to a news report by The Korea Herald.

The report said the ETFs, which seek to deliver twice the daily return of either Samsung Electronics or SK hynix, have intensified market swings as fund managers are required to rebalance their holdings at the end of each trading session, reinforcing both upward and downward price movements. According to news report, the products were introduced in May and quickly attracted strong investor interest, recording more than 10 trillion won (USD 6.9 billion) in trading value on their debut day, accounting for nearly one-third of all ETF trading. Combined assets under management later peaked at 17.6 trillion won before declining to 9.92 trillion won as the AI-driven chip rally reversed.

The report said the surge reflected strong speculative interest among retail investors seeking to amplify gains from South Korea's two largest chipmakers. However, market experts said the products have contributed to larger price swings after Samsung Electronics and SK hynix fell more than 30 per cent from their recent peaks amid concerns that major technology companies could slow AI infrastructure spending.

How Leveraged ETFs Amplify Volatility

"The leveraged chip ETFs do not create volatility from scratch. They simply magnify it," Lee Hyo-seob, Senior Research Fellow at the Korea Capital Market Institute, was quoted as saying by The Korea Herald.

The report explained that if Samsung Electronics or SK hynix rise during a trading session, ETF managers must buy additional shares before the market closes to maintain their targeted leverage. Conversely, when the stocks decline, fund managers are required to sell shares, reinforcing the prevailing market trend.

Broader Market Impact and Regulatory Response

It added that because Samsung Electronics and SK hynix together account for more than half of the Kospi by market capitalisation, these rebalancing trades can spill over into the broader market, increasing overall volatility.

Local regulators have responded by tightening restrictions on single-stock leveraged ETFs by raising minimum deposit requirements and increasing minimum trading units to curb speculative trading. However, the report said the measures are unlikely to eliminate volatility entirely as long as existing leveraged ETFs continue their daily portfolio rebalancing.

The report also noted signs that investor enthusiasm for the products may be easing, with inflows into leveraged ETFs, particularly those linked to Samsung Electronics, beginning to soften as losses deepen.

(Except for the headline, this story has not been edited by Asianetnews Editorial staff and is published from a syndicated feed.)