Amid sharp fluctuations in the Korean stock market, a two-times leveraged ETF tracking SK Hynix exhibited a significant price discrepancy. While the underlying stock fell nearly 8% that day, the ETF surged rapidly in the final trading hours, closing up over 50%—a clear deviation from its intended design—and brought the liquidity issues of single-stock leveraged ETFs in Korea into the spotlight.
After the closing bid failed, the price became unanchored.
This product is a 2x leveraged ETF tracking SK Hynix stock, closing at KRW 30,000 on Monday, a new all-time high. Given its design to track SK Hynix’s daily price movements with two times leverage, it should theoretically have declined by approximately 15% that day.
The fund manager, Korea Investment Management Co., later stated that the abnormal volatility was related to a system failure among liquidity providers. The company explained that as the market neared close, liquidity providers ceased their obligation to provide continuous quotes, causing bid-ask spreads to widen rapidly; some investors placed market orders to buy, driving the ETF price temporarily far away from its fair value.
Korean stocks' sharp decline amplifies the liquidity vacuum
On the day of the event, the Korean market faced broad pressure. The Kospi fell nearly 9% intraday, prompting the Korean exchange to trigger a 20-minute circuit breaker shortly after opening. Trading on the Kosdaq was also temporarily halted in the afternoon.
Market selling pressure has been concentrated primarily in the technology and semiconductor sectors. As capital exits AI-related trades, memory chip stocks such as Samsung Electronics and SK Hynitz have faced significant selling pressure. In this high-volatility environment, niche ETF products are more susceptible to liquidity shortages and price dislocations.
Jung In Yun, CEO of Fibonacci Asset Management, said such mispricings are uncommon but not unprecedented. ETFs typically rely on market makers to keep trading prices close to the underlying assets, but during the closing auction, this constraint may weaken, making products with lower trading volumes more susceptible to distortion.
Single-asset leveraged products regain attention for their risks
KIM ACE SK Hynix ETF is one of the single-stock leveraged ETFs newly launched in South Korea last month, primarily tracking chip stocks. These products require daily rebalancing to maintain their designated leverage ratio.
Goldman Sachs’ sales team previously noted that such rebalancing trades often involve buying more as prices rise and selling more as prices fall, potentially amplifying the volatility of the underlying assets. In recent rounds of sharp market declines, rebalancing flows from leveraged exchange-traded products have been viewed as one of the factors exacerbating market turbulence.
Investors who bought this ETF at a high price near the close face particularly direct risk. If market-making quotes return to normal on the next trading day, the product’s price may revert to a range closer to its fair value, leaving those who bought at the close with significant unrealized losses.
This incident once again highlights that during periods of low liquidity at market close, the trading price of a single-stock leveraged ETF may significantly deviate from its underlying asset, reigniting discussions in the Korean market about product design and market-making mechanisms.