The Kospi is displayed on a board at Hana Bank’s dealing room in Jung-gu, Seoul, on the 15th, as the index opened higher on a war-ending agreement between the U.S. and Iran. The Kospi opened at 8,526.12, up 402.50 points (4.95%), and the Kosdaq opened at 1,048.19, up 19.14 points (1.86%) from the previous session. Yonhap News
High-multiple leverage products tied to leading Korean stocks are launching one after another in overseas markets, raising concerns that supply-demand concentration could amplify volatility in the domestic stock market. Analysts say leverage products not permitted under Korean regulations are appearing first in overseas markets such as the United Kingdom and the United States, effectively creating a structure in which foreign markets absorb the speculative demand of Korean investors.
According to the financial investment industry Wednesday, Leverage Shares, a leveraged exchange-traded product (ETP) manager, listed triple-leverage ETPs based on Samsung Electronics (005930.KS) and SK hynix (000660.KS) on the London Stock Exchange Monday. The Samsung Electronics triple-leverage ETP rose 22.63% on its listing day. Considering that Samsung Electronics closed at 322,500 won on the domestic market the same day, up 7.86% from the previous day, the product showed volatility roughly three times the underlying asset’s return.
The products remain small in scale. The Samsung Electronics triple-leverage ETP has assets under management (AUM) of $284,320 (about 430 million won), while the SK hynix triple-leverage ETP stands at $543,335 (about 820 million won). However, the industry believes capital inflows could increase rapidly going forward, given the high interest among Korean investors. In fact, the single-stock leverage ETFs for Samsung Electronics and SK hynix listed domestically on the 27th of last month saw their net asset size, initially around 1 trillion won at listing, surge to 4 trillion won and 5 trillion won respectively this month.
These products were reportedly prepared with Korean investor demand in mind even before launch. Leverage Shares conducted a preliminary demand survey before the product launch through local subsidiaries of Korean securities firms, and judged that interest from Korean investors would be greater than that from UK investors. The industry believes Leverage Shares is considering launching additional leverage ETPs for other leading Korean stocks going forward.
In the United States, moves to introduce leverage products that cannot be launched in Korea are also continuing. Locally, the launch of double-leverage products based on underlying assets such as Samsung Electro-Mechanics and Hyundai Motor is reportedly being pursued.
In the domestic market, due to financial authority regulations, only single-stock leverage ETFs that track Samsung Electronics and SK hynix at twice their daily returns are currently listed on the Korea Exchange. Single-stock leverage ETFs for stocks other than Samsung Electronics and SK hynix, or products with multiples exceeding double, are not permitted.
The market is concerned that domestic stock market volatility could expand as more high-multiple products are traded overseas. Leverage products have a characteristic of trading large volumes of underlying assets before the market close to maintain their target multiples, making them a factor that amplifies stock price volatility. In particular, if high-multiple products on stocks with large market capitalization weights, such as Samsung Electronics and SK hynix, expand, the possibility of supply-demand distortion cannot be ruled out, observers note.
“Capital concentration into single-stock leverage ETFs and high-weight ETFs is leading to supply-demand outflows from semiconductor stocks other than Samsung Electronics and SK hynix, acting as a factor that widens the return gap,” said Yoon Jae-hong, an analyst at Mirae Asset Securities. “Capital inflows through overseas-listed ETFs are also accelerating this concentration phenomenon.”