Leveraged ETFs fuel semiconductor rally, but market concentration grows

South Korea's KOSPI index continued its upward trend for a second day, closing at 8228.70, a 2.25% increase. The rally was overwhelmingly powered by major semiconductor stocks, particularly Samsung Electronics and SK Hynix, while the vast majority of other listed companies saw their share prices fall.

On this day, only 75 out of 900 listed companies on the stock market saw gains, with 826 declining. Large-cap stocks, those ranking in the top 100 by market capitalization, rose by an average of 2.74%. However, mid-cap and small-cap stocks experienced declines of 3.03% and 3.44%, respectively. The sectors that outperformed the KOSPI's overall rise were predominantly those containing semiconductor companies: electrical and electronics (4.28%) and information technology (6.62%), along with manufacturing (2.82%).

Samsung Electronics closed at 307,000 won, up 2.68%, while SK Hynix surged by 9.31% to 2,243,000 won. This surge was partly influenced by a nearly 20% jump in US semiconductor firm Micron Technology's stock overnight, reigniting investor optimism for a semiconductor rally. The influx of capital into these two companies pushed their combined market capitalization to over 50% of the KOSPI's total. SK Hynix's market capitalization surpassed $1 trillion for the first time, ranking it 12th globally, just behind Samsung Electronics at 11th.

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The continuous buying of the underlying stocks and futures is necessary to construct these products, so funds will inevitably continue to flow into Samsung Electronics and Hynix. The concentration in these two stocks is bound to worsen.

The launch of new single-stock leveraged Exchange Traded Funds (ETFs) for Samsung Electronics and SK Hynix is seen as exacerbating the concentration in semiconductor stocks and increasing market volatility. These ETFs, which aim to track the daily price movements of the underlying stocks with leverage, attracted 10.4 trillion won in trading volume on their launch day alone, significantly exceeding their initial offering of 4 trillion won. This massive inflow of funds necessitates continuous buying of the underlying stocks and futures by ETF providers, further driving up the prices of Samsung Electronics and SK Hynix.

The market experienced increased volatility, evidenced by the activation of the "buy-side car" mechanism, a temporary trading halt to curb excessive price swings, for the tenth time this year on the KOSPI, and the fourth time this month. Analysts noted that semiconductors were the primary drivers of these trading halts.

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Semiconductors led the sidecar.