South Korea’s Financial Regulators Address Market Dominance of Leveraged Samsung, SK Hynix ETFs
South Korea’s financial regulators are intensifying efforts to curb the growing influence of leveraged exchange-traded funds (ETFs) tracking the nation’s leading chipmakers, Samsung Electronics and SK hynix. Concerns are mounting that trading in these specialized products has begun to disproportionately dominate the overall market.
Financial Supervisory Service (FSS) Governor Lee Chan-jin, the nation’s chief financial regulator, openly acknowledged the complexities, stating there is no straightforward solution to effectively manage the market impact stemming from these leveraged ETFs.
During a closed-door meeting on Monday with executives from local asset management firms, Governor Lee reportedly remarked that a “straightforward solution was unlikely,” further characterizing the issues linked to these ETFs as “structural” in nature.
He cautioned that while authorities are nearing an announcement after solidifying their official stance on the leveraged ETFs, the underlying situation is not one that can be easily resolved.
“This challenge cannot be resolved with a singular, one-off measure. It demands continuous market monitoring, alongside ongoing adjustments and refinements to our regulatory approach,” he emphasized.
Governor Lee’s most recent statements underscore a consistent theme, following several weeks of expressions of regret concerning the initial launch of these leveraged ETF products.
During a press conference held on June 22, Governor Lee had previously voiced significant concern “about the excessive side effects that have emerged since the launch of these leveraged ETFs.”
“I personally question whether we should have taken more aggressive steps to prevent their launch, even if it required resorting to extreme measures,” he reflected.
Despite Lee’s earlier indication at the conference that authorities were actively discussing potential responses – including curbs on margin and credit-backed trading – no specific regulatory measures have been formally announced to date.
Leveraged Chipmaker ETFs Experience Sharp Declines Amid Market Volatility
Leveraged ETFs intricately linked to Samsung Electronics and SK hynix have endured significant volatility recently, mirroring a sharp correction in their underlying chip stocks. This downturn is largely fueled by escalating concerns that the global semiconductor cycle might be nearing its peak.
On Monday, a stark illustration of this volatility saw all 14 long single-stock leveraged ETFs tracking Samsung Electronics and SK hynix (excluding two inverse products) plummet to record lows. These funds experienced substantial losses, plunging between 20 to 30 percent amidst a broad market rout.
Despite a rebound of 7 to 8 percent in the subsequent trading session, these gains proved insufficient to fully offset the significant losses incurred just the day prior.
The cumulative assets under management for these 16 ETFs notably contracted to 10.34 trillion won ($6.9 billion) as of Tuesday’s market close. This represents a sharp decline from over 16 trillion won recorded on June 25, highlighting the rapid erosion of value.
Remarkably, the speculative frenzy surrounding these products shows minimal signs of abating, even in the face of significant market correction.
Indeed, trading turnover for the 16 ETFs surged from 10.12 trillion won on Friday to a substantial 12.14 trillion won on Monday. On Monday alone, these specific funds collectively represented approximately a quarter of the entire ETF market’s total turnover, which stood at roughly 46 trillion won.
Yeom Dong-chan, an analyst at Korea Investment & Securities, posited that the amplified volatility observed in these leveraged ETFs is directly attributable to their unusually heavy trading volumes when compared to their respective underlying shares.
“Between June 1 and Friday, for instance, turnover in leveraged ETFs tracking Micron Technology and Tesla constituted 5.36 percent and 4.31 percent, respectively, of the trading volume in their underlying shares. In sharp contrast, these figures soared to 30.38 percent for SK hynix and 20.07 percent for Samsung Electronics,” Yeom elaborated.
However, Yeom also issued a caution against singularly attributing the recent surge in Kospi volatility solely to the influence of leveraged ETFs.
“Considering that market volatility was notably more pronounced during the morning trading hours compared to the afternoon – a period when leveraged ETFs typically perform their rebalancing – it becomes challenging to definitively conclude that these ETFs were the sole primary driver behind the significant market swings,” he explained.
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