South Korea’s single-stock leveraged ETFs again reveal pricing distortions. A double-long product tracking SK Hynix moved in the opposite direction of the underlying stock for two consecutive trading days, with a significant deviation; the Korean exchange has flagged this fund and two others as potential investment warning candidates.
Two consecutive trading days of opposite price movements
The design objective of this KIM ACE SK Hynix ETF is to deliver twice the daily return of SK Hynix's stock price; however, its actual performance significantly deviates from this objective.
On Monday, SK Hynix's stock fell nearly 8%, but this ETF rose 50% to close at 30,000 KRW, setting a new all-time high. With a two-times leverage, it was theoretically expected to decline by around 15%. Most similar tracking products fell within their expected ranges that day, with the anomaly concentrated in this particular fund.
On Tuesday, the situation reversed again. SK Hynix closed up approximately 16%, while the ETF fell nearly 40% intraday and closed down about 27%, once again moving in the opposite direction of the broader market.
The manager attributed the issue to a quoting failure.
The fund manager, Korea Investment Management, stated that Monday's anomaly was related to a system failure with the liquidity provider's quoting system. The company will conduct a comprehensive review of the relevant mechanisms and implement measures to prevent similar incidents from occurring again.
The company explained that as the close approached, liquidity providers were no longer obligated to maintain continuous quotes, causing the bid-ask spread to widen rapidly. During periods of sharp price volatility, investors' market buy orders were executed at higher prices, briefly pushing up the ETF's price.
Market participants have also pointed to the liquidity vacuum during the closing phase. Analysts note that ETFs typically rely on market makers to keep market prices close to net asset value, but this mechanism may weaken around opening and closing auction periods, especially in less actively traded sub-sectors.
The aftermath of single-stock leveraged ETF expansion is becoming apparent
This fund is one of the single-stock leveraged ETFs that recently launched in Korea. According to Bloomberg Intelligence data, 16 similar products debuted on May 27, with a combined asset size of approximately $3 billion, which quickly grew to $5.5 billion driven by new inflows and rising underlying stock prices.
These products typically amplify daily returns through derivatives and swap contracts, but issuers must frequently rebalance positions to maintain the target leverage ratio. When multiple products track the same popular stock, the rebalancing trades themselves can amplify intraday volatility.
Goldman Sachs' sales team previously noted in a report that the rebalancing cash flows associated with these products may have been one of the drivers behind recent increased volatility in the Korean market. Buying on rallies and selling on declines can further amplify price swings.
Market volatility amplifies distortion risk.
At the time of the event, the Korean stock market itself was also experiencing significant volatility. On Monday, the Kospi fell nearly 9% intraday, triggering a 20-minute trading halt, and trading on the Kosdaq was also temporarily suspended in the afternoon.
Amidst pressure on overall market liquidity, pricing deviations in single-stock leveraged ETFs are more likely to be amplified. This anomaly has also prompted the market to reevaluate the trading structure risks behind the rapid expansion of single-stock leveraged ETFs in Korea.