SK Hynix’s leveraged ETF is evolving from a single trading instrument into a significant force influencing volatility in South Korean and even global technology stocks. According to Bloomberg, this two-times leveraged ETF, launched by Nan Fung, has grown to approximately $13 billion in assets within just nine months, becoming one of the largest single-stock leveraged funds of its kind globally.
The core feature of these products is maintaining a fixed leverage ratio daily. When the underlying stock price experiences significant fluctuations, the fund must rebalance its position at the close of trading, requiring banks, market makers, and hedge funds to simultaneously complete financing and risk hedging. As capital continues to flow in, these trades no longer affect only Hynix alone but are also beginning to spread to the Korean stock index and global technology stocks.
The fund size has altered the trading rhythm.
Reports indicate that on highly volatile trading days, the volume of this ETF and similar products can account for up to two-thirds of the total trading volume of SK Hynix shares. For a large semiconductor company, this level of participation is sufficient to alter intraday trading dynamics.
SK Hynix currently accounts for approximately 28% of the KOSPI index, while Samsung Electronics accounts for about 29%. The combined weight of these two companies is so significant that fluctuations in Hynix’s stock price are no longer just an individual stock event—they quickly impact the broader Korean market and global technology sector sentiment.
Many traders now position themselves in the afternoon, waiting for leveraged funds to rebalance at the close, then close their positions before the market closes. For many trading desks, estimating the daily rebalancing volume of this ETF has become as important as analyzing a company’s fundamentals.
Bank hedging costs continue to rise
To maintain product operations, banks typically provide leverage through swap agreements and hedge risks using stocks, futures, options, and exotic derivatives. As fund sizes grow, the cost of this system rises rapidly.
Reports indicate that some banks offering swaps have faced funding and risk limit constraints, leading them to reduce their exposure to Hynix and increase fees. The annualized cost of cliquet derivatives designed to hedge against a sharp decline in Hynix’s stock price has risen from approximately 3% in March to over 10%.
- The ETF size is approximately $13 billion.
- Annual return of approximately 718%
- Theoretical double-compounded return of approximately 921%
This has also directly weighed on the fund’s performance. Bloomberg Intelligence estimates that, as of June 29, the ETF’s year-to-date return was approximately 718%, below the theoretical 921% expected from a two-times daily compounded exposure. The gap between the two reflects how financing and hedging costs are eroding returns.
Pullbacks may amplify selling pressure.
The market is more concerned not about the upward phase, but about forced selling following a reversal in momentum. Leveraged ETFs must rebalance daily according to predefined rules; if the underlying asset continues to decline, the fund may keep selling during weak market conditions, further amplifying the downturn.
Reports indicate that South Korea's KOSPI index plunged as much as 10% last week, dragging down the Nasdaq index by 3%. Strategy analysts estimate that for every 1% market movement, leveraged ETFs may trigger approximately $9 billion in rebalancing demand. If SK Hynix continues to decline, this pressure could spread to index futures and other derivatives markets.
South Korean regulators have also expressed concern over the recent approval of multiple leveraged ETFs tracking domestic semiconductor stocks, stating that such products could exacerbate market volatility. Data shows that over 90% of investors in these funds are retail investors.
- The market moves by 1%
- Leveraged ETFs may trigger around $9 billion in rebalancing.
- Over 90% of investors in Korea-related products are retail investors.
Additional information: The report states that SK Hynitz plans to list in the U.S. with an estimated valuation of approximately $29 billion. If this arrangement proceeds, stock liquidity is expected to improve, partially alleviating the impact of leveraged ETF cash flows on a single market.