Leveraged ETFs tracking AI and semiconductor stocks are causing high volatility in South Korea’s major tech firms. These funds use borrowed money to amplify daily returns, forcing aggressive rebalancing that influences stock prices. As these instruments gain popularity, South Korean regulators have introduced restrictions to manage market stability.
The rise of leveraged Exchange-Traded Funds (ETFs) focused on the artificial intelligence and semiconductor sectors is changing how Asian markets operate. Unlike standard funds, these instruments use derivatives such as futures and swaps to multiply daily returns by two, three, or even five times. While this can increase gains when a stock rises, it also magnifies losses during downturns, creating a high-risk environment for investors.
Impact on Semiconductor Giants
South Korean semiconductor leaders, specifically Samsung Electronics and SK Hynix, are currently at the center of this trend. Because these companies hold a massive weight in the KOSPI index, the trading activity within these leveraged ETFs has a direct impact on their stock prices. For instance, the CSOP-managed, twice-leveraged ETF tracking SK Hynix has grown into the largest of its kind globally, holding approximately HK$51.8 billion or $6.6 billion in assets. The massive capital inflows and the fund’s requirement to rebalance its portfolio daily create a feedback loop that forces the fund to buy or sell the underlying shares repeatedly, which can lead to significant and sudden price swings.
Regulatory Scrutiny in South Korea
This trend has drawn sharp attention from South Korean financial authorities. The Financial Services Commission has implemented new measures to curb the growth of these products, including a ban on promotional activities and cautionary advisories against the launch of new single-stock leveraged funds. These steps follow an acknowledgment from the Financial Supervisory Service that previous approvals for these financial products may have been rushed in an attempt to keep retail investors active in the local market and to support the Korean won.
Risks for Investors
For investors, the primary risk lies in the mechanics of daily rebalancing. These funds are designed to perform based on daily targets, which means they are generally not suitable for long-term holding. The performance of a leveraged ETF over time can deviate significantly from the returns of the underlying stock due to the costs of maintaining leverage and the impact of compounding losses during periods of high volatility. As regulators continue to monitor the influence of these funds on the KOSPI index, any further tightening of rules could lead to reduced liquidity or changes in how these ETFs operate, potentially affecting the price stability of the semiconductor stocks they track.