‘Tail Wagging the Dog’: Leveraged Samsung, SK Hynix ETF Shock Ripples Across Global Stocks

Bloomberg Says Leveraged ETF Boom Is Letting the Tail Wag the Dog, Hitting Korea’s Samsung-SK Hynix Trades

Nomura Says Every 1% Market Move Triggers About $9 Billion of Rebalancing by Leveraged ETFs

Financial Authorities Hold Emergency Meeting With Brokerages

Selling in exchange-traded funds holding Samsung Electronics Co. and SK Hynix Inc. is rippling through global equity markets. High-leverage products tied to the two stocks have, in particular, dramatically amplified market volatility.

Bloomberg reported on June 23 that the global leveraged ETF market, which has swollen to $290 billion, is now adding to instability by creating a stock-market dynamic in which the tail is wagging the dog.

Bloomberg said overlapping selling linked to leveraged ETFs tracking SK Hynix and Samsung Electronics worsened the turmoil. Warnings about overheated technology stocks are nothing new, but the latest slide was triggered as volatility intensified in South Korea, the world’s best-performing market this year.

A day earlier, the Kospi plunged 910 points, or 9.9%, its biggest drop on record, as it reacted to a semiconductor selloff in US technology shares. Samsung Electronics and SK Hynix, South Korea’s two chip heavyweights, each fell more than 12%. In Japan, Kioxia Holdings Corp. widened its intraday loss to 16%, with chip stocks across Asia tumbling.

The selloff then spread to the US market the same day. The Nasdaq Composite dropped 2.22% as investors reacted to the rout in Asian semiconductor shares. The Philadelphia Semiconductor Index sank 7.6% on valuation concerns around artificial intelligence and worries that the rally had gone too far. Micron Technology Inc. slumped 13.2% ahead of earnings. Qualcomm Inc. fell 8.0%, Intel Corp. lost 6.1% and Advanced Micro Devices Inc. dropped 6.0%.

Weakness in US technology shares often spills over into South Korea and undermines investor sentiment there. It is unusual, however, for volatility to be amplified so sharply in Korea and then spread back into US markets.

Kim Se-hwan, an analyst at KB Securities Co., said investor sentiment appeared to weaken as selling in AI and semiconductor shares that began in Asian markets coincided with rising expectations for another Federal Reserve rate increase. The more than 12% plunge in Samsung Electronics and SK Hynix helped transmit selling pressure from Asia to the US market, he added.

The Wall Street Journal said the broader selloff that began in Asian markets gathered momentum after Samsung Electronics and SK Hynix each tumbled 12% in South Korea. Nikkei said investor money had rushed into a single sector on FOMO, or fear of missing out, and that mechanical, cyclical flows through leveraged ETFs further amplified moves in chip stocks.

Leveraged ETFs are designed to track gains or losses in an underlying asset by a multiple. They can deliver higher returns when prices rise, but they also magnify losses when prices fall. As retail investors chased stronger returns during the recent global equity bull market, assets in leveraged ETFs expanded rapidly, led by the US with $220 billion and Asia with $45 billion.

After the previous day’s selloff, seven single-stock leveraged ETFs tied to Samsung Electronics posted an average loss of 24.6%. Seven single-stock leveraged ETFs linked to SK Hynix lost 25.6% on average.

The problem is that single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix track daily returns, forcing them to rebalance every day. They buy more when shares rise and sell more when shares fall. That mechanical cycle repeats daily, and the resulting buy and sell orders put heavy pressure on the underlying cash equity market.

Nomura Securities said leveraged ETFs generate about $9 billion of rebalancing demand every time the market moves 1%. South Korea sits at the center of that dynamic because it is a key hub for global AI semiconductor trading, according to the analysis.

As volatility tied to leveraged ETFs spread across both Korean and global markets, authorities moved into emergency mode. The Financial Supervisory Service held an emergency meeting that day with the Korea Financial Investment Association and chief risk officers from 10 major brokerages to discuss risk management and investor protection measures.

Lee Chan-jin, head of the Financial Supervisory Service, said at a press briefing on June 22 that he personally regretted not stopping single-stock leveraged products before they were launched. If stock-market volatility increases, it could deliver a major blow to households, and authorities are considering separate safety measures, he said.

Noh Jung-dong, Hankyung.com reporter dong2@hankyung.com