Following the launch of single-stock leveraged and inverse exchange-traded funds (ETFs) that track the fluctuations of Samsung Electronics and SK Hynix at double the rate, concerns have arisen regarding increased volatility in the South Korean stock market. As the ETF market expands, the 'Wag the Dog' phenomenon, where passive fund flows influence the prices of individual stocks, has intensified, raising fears that the volatility of Samsung Electronics and SK Hynix, which hold a dominant market capitalization, could affect the broader KOSPI index.
According to the Korea Exchange, the KOSPI 200 Volatility Index (VKOSPI) closed at 89.91 on June 12. Although this is slightly lower than the record high of 91.23 reached on June 9, it remains at a high level in the upper 80s. The index has consistently surpassed 80.37, recorded on March 4, the second trading day after the outbreak of war between the U.S. and Iran.
Since the launch of the single-stock leveraged ETF on May 27, the VKOSPI, which was at its lowest point of 70.78 on the listing day, has shown a steady upward trend. The VKOSPI estimates market volatility over the next 30 days based on KOSPI 200 option prices and is often referred to as the 'fear index' as it rises with increased risk of sharp price declines.
Market analysts believe there is a significant correlation between the launch of single-stock leveraged ETFs and the increase in volatility. During the 12 trading days following the ETF launch, sidecars were activated seven times on the stock market, including on May 27, June 1, 5, 8, 9, 10, and 12. This indicates that days with sidecar activations outnumbered those without.
A sidecar is a market stabilization mechanism that halts program trading for five minutes if the KOSPI 200 futures price rises or falls by more than 5% compared to the previous trading day for over one minute.
Industry experts point out that the structure of single-stock leveraged ETFs can inherently increase volatility. These ETFs aim to track multiples of daily returns, necessitating rebalancing at the end of each trading day to align with the net asset value (NAV) calculation. As the size of the fund grows and the daily price fluctuations of the underlying assets increase, the volume of trading related to rebalancing also rises.
High turnover rates further exacerbate concerns. Since the launch, the average daily turnover rate based on trading volume for the SOL SK Hynix Single Stock Inverse 2X ETF reached 1025%. The PLUS Samsung Electronics Single Stock Inverse 2X ETF recorded a turnover rate of 350%. All four of the largest single-stock leveraged ETFs exceeded a turnover rate of 110%, with the lowest at 46%. In contrast, the average turnover rate for the entire domestic ETF market during the same period was around 8%, highlighting the elevated levels of activity.
Investor interest remains robust. As of May 31, the number of applicants for training in single-stock leveraged ETFs reached 383,549, with 353,517 completing the program. This is an increase of 171,549 applicants and 159,674 completers compared to the figures on May 26, just before the launch, which were 212,000 applicants and 193,843 completers.
An industry insider stated, "Given the significant market capitalization of Samsung Electronics and SK Hynix, if the size of the single-stock leveraged ETFs continues to grow, it is likely that the volatility of these stocks will translate into index volatility."
* This article has been translated by AI.
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