Authorities prepare response as Samsung, SK hynix leveraged funds dominate trading
South Korea’s financial regulators are scrambling to curb the influence of leveraged exchange-traded funds tracking the country’s top chipmakers, Samsung Electronics and SK hynix, amid concerns that trading in the products has come to dominate the market.
Financial Supervisory Service Gov. Lee Chan-jin, the country’s top financial regulator, acknowledged that there is no easy way to address the market impact of the leveraged ETFs.
At a closed-door meeting with the heads of local asset managers held Monday, Lee reportedly said that “a straightforward solution was unlikely,” describing the problems associated with the ETFs as “structural.”
While the authorities would soon make an announcement after finalizing their stance on the leveraged ETFs, the situation cannot be easily resolved, he cautioned.
“This is not something that can be resolved with a one-off measure. It will require continuous monitoring, as well as ongoing adjustments and refinements,” he said.
Lee’s latest remarks follow a series of expressions of regret in recent weeks over the launch of the leveraged ETFs.
At a press conference on June 22, Lee expressed concern “about the excessive side effects that have emerged since the launch of leveraged ETFs.”
“I personally wonder whether we should have done more to stop them, even if it meant going to extreme lengths,” he said.
Though Lee said at the conference that the authorities were discussing possible responses, including curbs related to margin and credit-backed trading, no specific measures have yet been announced.
Leveraged chip bet backfires
Leveraged ETFs tied to Samsung Electronics and SK hynix have been on a wild ride amid a sharp correction in the underlying chip stocks, fueled by concerns that the semiconductor cycle may be peaking.
On Monday, all 14 long single-stock leveraged ETFs tied to Samsung Electronics and SK hynix, excluding two inverse products, tumbled to record lows, plunging 20 to 30 percent in a broad market rout.
Although the ETFs rebounded 7 to 8 percent in the following session, the gains were not enough to offset the previous day’s losses.
The combined assets of the 16 ETFs had shrunk to 10.34 trillion won ($6.9 billion) as of Tuesday’s market close, down sharply from more than 16 trillion won on June 25.
Yet, the speculative frenzy shows little sign of fading even amid the market correction.
Turnover in the 16 ETFs rose from 10.12 trillion won on Friday to 12.14 trillion won on Monday. On Monday alone, the funds accounted for about a quarter of the ETF market’s total turnover of roughly 46 trillion won.
Korea Investment & Securities analyst Yeom Dong-chan attributed the heightened volatility in the leveraged ETFs to their unusually heavy trading relative to their underlying shares.
“Between June 1 and Friday, turnover in leveraged ETFs tracking Micron Technology and Tesla amounted to 5.36 percent and 4.31 percent, respectively, of trading in their underlying shares. By contrast, the figures reached 30.38 percent for SK hynix and 20.07 percent for Samsung Electronics,” Yeom said.
Yeom cautioned, however, against attributing the recent surge in Kospi volatility solely to leveraged ETFs.
“Given that volatility was even more pronounced in the morning than in the afternoon, when leveraged ETFs typically carry out their rebalancing, it is difficult to conclude that the ETFs were the primary driver of the market swings,” he said.
silverstar@heraldcorp.com
