The recent decline in the KOSPI index has reignited discussions surrounding the volatility of single-stock leverage exchange-traded funds (ETFs) linked to Samsung Electronics and SK Hynix. While some argue that the rebalancing trades of these leverage products have exacerbated the market downturn, others contend that it is excessive to label these stocks as the primary culprits behind the decline.
According to the Korea Exchange, the KOSPI index fell by 10.40% from July 7. During this period, Samsung Electronics and SK Hynix saw declines of 12.58% and 6.70%, respectively, leading to even larger drops in their single-stock leverage products. Seven of these products recorded declines of 12% to 13% compared to July 7, while another seven experienced drops of around 23%. All but one, the 'KODEX SK Hynix Single-Stock Leverage' ETF (priced at 21,930 won), fell below the initial listing price of 20,000 won.
Single-stock leverage products have previously been identified as factors contributing to increased index volatility. Critics argue that the rebalancing trades of these ETFs amplify market fluctuations. Rebalancing involves adjusting the proportion of underlying assets by buying more when prices rise and selling when they fall to meet targeted returns. This process is similar to the 'short gamma' phenomenon in the options market. Han Ji-young, a researcher at Kiwoom Securities, stated, "The surge in single-stock leverage trading has artificially intensified the downward pressure due to the short gamma effect in the derivatives market."
Conversely, some analysts suggest that individual investors' counter-trend trading may actually help mitigate volatility. This trading style involves increasing net purchases when stock prices fall and decreasing them when prices rise. Jang Geun-hyuk, a senior researcher at the Capital Market Research Institute, noted, "Since the first week after the launch of leverage products, individual investors have been engaging in counter-trend trading, which may partially offset the volatility caused by rebalancing effects."
In fact, during the two days of the market decline, individual investors heavily purchased these single-stock leverage products. According to the Korea Exchange, from July 7 to 8, individual investors net bought 758.8 billion won worth of Samsung Electronics and SK Hynix single-stock leverage products, accounting for 46.9% of the total net purchases in all ETF products. Individuals net bought 288.6 billion won in Samsung Electronics single-stock leverage products and 470.2 billion won in SK Hynix single-stock leverage products, betting nearly twice as much on SK Hynix.
There are also claims that the premium rates for these products remain stable. Lee Sang-hyun, a researcher at Meritz Securities, explained, "The premium rate for the Samsung Electronics leverage ETF averages 0.84%, while the SK Hynix leverage ETF averages 0.90%, both tracking net asset value (NAV) well under 1%. Since their listing until July 6, the cumulative rate exceeding 1% has been 34.3% for Samsung Electronics and 25.7% for SK Hynix, indicating relatively faithful management." According to exchange regulations, if the daily premium rate of a leverage ETF exceeds 1%, disclosure obligations arise.
Industry insiders also agree that interpreting single-stock leverage products as the sole cause of market volatility is excessive. One industry source stated, "When the market rises, individual investors tend to realize profits, leading to redemption demands for fund managers. In this process, fund managers may sell underlying assets to meet redemption requests, which can offset one-sided supply shocks due to buying pressure from new investments."
Another market participant remarked, "The recent increase in volatility for Samsung Electronics and SK Hynix should be viewed as a result of macro uncertainties stemming from the U.S.-Iran conflict and concerns over the global semiconductor industry's peak. It is unreasonable to attribute this solely to single-stock leverage products."
* This article has been translated by AI.
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