Leveraged ETF Craze Reaches Japan as US Issuers Target Kioxia, Sony

Will Japan Also Get a ‘Leverage Shock’?

US Asset Managers Seek Listings

Fears Rise That Stock Volatility Could Worsen as It Did in South Korea

The frenzy over leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. that shook South Korea’s stock market is spreading to Japan. US asset managers are seeking to list leveraged ETFs that track Kioxia Holdings Corp., Japan’s memory-chip maker, at two to three times the stock’s daily moves. Japan does not allow single-stock leveraged ETFs, but market participants are discussing whether such products could be listed in the US first and then sold in Japan in a form of regulatory re-entry.

As of Aug. 14, five US ETF issuers, including Tuttle Capital Management, ProShares and Tidal, had filed with the Securities and Exchange Commission to launch leveraged ETFs linked to Kioxia this summer, according to SEC filings. The Nihon Keizai Shimbun reported that applications are also being filed for leveraged ETFs tied to leading Japanese companies including Toyota Motor Corp., Sony Group Corp. and SoftBank Group Corp. Toyota and Sony have American depositary receipts listed in the US, making such products easier to manage and lowering the bar for approval.

US issuers’ growing interest in Japanese companies is being driven in part by South Korea’s boom in leveraged semiconductor products. South Korea allowed single-stock leveraged ETFs this spring, and products tied to Samsung Electronics and SK Hynix were listed in May. Retail investors poured money into the funds, sending both stocks through sharp swings. As volatility spread to the Kospi, where the two companies have heavy weightings, financial regulators moved to tighten oversight.

Interest in memory-chip makers is also rising globally as investment in artificial intelligence expands. Matthew Tuttle, chief executive officer of Tuttle Capital, said Kioxia “could become the next SK Hynix.” He expects Kioxia to attract similar demand, betting it can gain recognition among US investors much as SK Hynix did through its rise in corporate value and its US ADR listing.

Leveraged ETFs are designed to deliver two or three times the daily return of a stock or index. They are popular with retail investors because they offer the chance of outsized gains with relatively little capital. But some market participants worry that mechanical trading using derivatives can further amplify volatility in the underlying shares.

SEC approval remains the main hurdle for a Kioxia ETF. Products tied to Toyota and Sony are relatively straightforward because both companies have ADRs listed in the US. Kioxia has no US ADR, which could slow the approval process.

Japan currently allows only leveraged ETFs linked to stock indexes, not individual shares. Still, ETFs listed in the US can be sold to Japanese investors as foreign investment trusts if the asset manager files with Japan’s Financial Services Agency.

That means a Kioxia leveraged ETF, if approved in the US, could effectively sidestep Japan’s restrictions and be sold to investors there. Tuttle said his firm plans to register the product in Japan as a foreign investment trust if the SEC approves it. That would open a path for the leveraged ETF boom that began with Samsung Electronics and SK Hynix in South Korea to spread to Japan via the US market.

Some in the market fear Japan could see a repeat of the volatility that followed the listing of Samsung Electronics and SK Hynix leveraged ETFs in South Korea. One Japanese market official said a rush of money into single-stock leveraged products could increase volatility not only in the underlying shares but across the broader market index. Japan should guard against a repeat of South Korea’s experience, the person added.

Choi Man-su, Tokyo correspondent, Hankyung.com bebop@hankyung.com