Regulatory Clampdown on 'Samsung Electronics-SK hynix Leverage' Raises Concerns Over a 'Balloon Effect' in Overseas and Semiconductor ETFs

[Financial News] Financial authorities' regulations on single-stock leveraged exchange-traded funds (ETFs) are proving effective in cooling overheated investor sentiment, but analysts say they could also trigger a "balloon effect," with demand shifting to index-based semiconductor ETFs or leveraged products listed overseas.
Korea Investment & Securities said in a report released on the 9th, titled "Review of Leveraged ETF Rebalancing After Regulation," that domestic financial authorities' restrictions on leveraged ETFs have been effective in reducing trading volume and rebalancing demand, as the market correction has also led to a decline in assets under management (AUM) for leveraged ETFs.
According to the report, as of the 4th, the total net assets of single-stock leveraged ETFs based on Samsung Electronics and SK hynix had fallen to 1.6 trillion won and 2.9 trillion won, respectively. That represents 45% and 42% of their peak levels.
Trading activity has also weakened sharply. The average daily trading value of the Samsung Electronics and SK hynix leveraged ETFs has dropped to about 200 billion won and 400 billion won, respectively, down roughly 90% from their peak trading levels.
However, securities firms warned that the regulations could also produce side effects.
Jeong Hyeon-jong, a researcher at Korea Investment & Securities, said, "The current regulations are focused on leveraged products tied to individual stocks," adding, "The rise in trading volume for semiconductor leveraged ETFs after the rules took effect suggests a balloon effect, with investor demand shifting to other products."
He also highlighted the possibility that funds could move into overseas-listed products that are not subject to domestic regulations.
The total net asset value of CSOP's Samsung Electronics and SK hynix leveraged ETFs listed on the Hong Kong stock market stands at $900 million and $4.4 billion, respectively, a scale comparable to the domestic market for single-stock leveraged ETFs.
Jeong noted, "As the market for leveraged and inverse ETFs managed overseas grows, foreign investors' trend-following and momentum trading during rebalancing could intensify volatility in the domestic stock market."
In fact, analysts found that CSOP's SK hynix leveraged ETF continued to add units even during periods when its assets were declining after the domestic regulations were introduced. They said new money may have kept flowing in as global investors and domestic buyers viewed SK hynix's sharp stock decline in July as a buying opportunity.
They also pointed to the fact that overseas asset managers such as Leverage Shares and ProShares have been rolling out leveraged ETFs based on SK hynix American Depositary Receipts (ADRs), which could partially offset the impact of domestic regulations.
Securities firms said the single-stock leveraged ETF rules have helped calm overheated trading in the short term, but if investor demand continues to shift to other leveraged products or overseas markets, the effectiveness of the regulations will need to be reassessed.
[email protected] Seo Yoon-kyung Reporter