Single-Stock Leverage Curbs Drive Spillover to Semiconductor, Overseas ETFs

Korea Investment & Securities Report

Korea Investment & Securities said on Aug. 7 that trading value in related products on South Korea’s stock market has fallen since regulators tightened rules on single-stock leveraged exchange-traded funds, but demand is shifting to semiconductor and overseas-listed ETFs in a spillover effect.

“The rise in trading value for semiconductor leveraged ETFs after the rules took effect, unlike single-stock leveraged ETFs, suggests a spillover effect from the regulation,” analyst Jung Hyun-jong said.

Jung wrote that the tougher leveraged ETF rules introduced by financial authorities are focused on “single-stock-based leveraged products.” He noted that the KODEX Semiconductor Leverage ETF, which tracks twice the daily return of the KRX Semiconductor Index, still carries a minimum deposit requirement of 10 million won.

Samsung Electronics and SK Hynix account for 39% and 23% of the KODEX Semiconductor ETF, respectively, meaning it can partly substitute for demand for single-stock leveraged bets, he added.

Jung also said investors need to consider the size of overseas-listed leveraged ETFs tied to Korean stocks that are not subject to domestic regulation. The CSOP SK Hynix Daily (2x) Leveraged ETF listed in Hong Kong has the largest market capitalization among global single-stock leveraged ETFs.

The number of outstanding units in the CSOP SK Hynix leveraged ETF continued to rise even during periods when assets under management declined, according to Jung. After the underlying stock plunged in July, new ETF share issuance may have increased as global leveraged investors and Korean investors seeking alternatives moved in, viewing the selloff as a buying opportunity.

He also said overseas asset managers have begun launching leveraged ETFs based on SK Hynix American depositary receipts. As overseas leveraged and inverse markets expand, rebalancing demand could amplify volatility in South Korea’s stock market by triggering trend-following or momentum trading by foreign investors.

“It will not be easy for domestic regulation alone to contain spillover effects or global demand to invest in the semiconductor cycle, so the long-term impact of the rules needs to be monitored,” Jung said.

Lee Su, Hankyung.com reporter 2su@hankyung.com