Explosive rise in chip ETFs raises concerns of market overheating

South Korea's stock market achieved a new all-time high on May 27, with the KOSPI index climbing to 8228.70, a 2.25% increase. This surge was primarily fueled by investor confidence in a semiconductor supercycle, leading to an overwhelming demand for stocks in Samsung Electronics and SK Hynix, the nation's leading chipmakers.

The launch of the first single-stock leveraged ETFs in South Korea, based on Samsung Electronics and SK Hynix, generated immense investor interest on their debut. These ETFs, designed to amplify daily stock movements by a factor of two, attracted over 10 trillion won in trading volume and reached a market capitalization of 5 trillion won on their first day, far exceeding their initial offering of 4 trillion won. The intense demand for the mandatory online educational program required for investing in these high-risk products temporarily crashed the program's website.

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The extreme concentration in these two stocks, coupled with the massive inflow of funds into leveraged products, is further intensifying the concentration phenomenon.

However, this concentrated investment in just two companies is raising significant concerns about market overheating and increased volatility. While the leveraged ETFs for Samsung and SK Hynix posted substantial gains, the broader market suffered. Only 75 KOSPI-listed stocks saw gains, while 826 declined. The market capitalization of Samsung and SK Hynix now constitutes over half of the KOSPI's total value. This extreme concentration, amplified by the inflow of funds into leveraged products, is intensifying market swings. The KOSPI has experienced four "buy-side car" activations, a mechanism to temporarily halt trading during rapid price increases, this month alone, and the KOSPI 200 volatility index is more than triple its average since 2010.

Analysts suggest that the robust performance and future growth potential of Samsung and SK Hynix are driving this investment frenzy. Yet, they caution that the resulting extreme concentration and volatility could encourage short-term trading and excessive borrowing (known as 'debt-to-equity' or '빚투' in Korean), moving the market further away from sound capital market principles that favor long-term holding and stable dividends. The article calls for heightened vigilance from both the government and investors.

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The extreme concentration and volatility resulting from this could further fuel short-term trading and 'debt-to-equity' investment, moving further away from a healthy capital market.