Single-Stock Leverage Curbs Spark Semiconductor ETF Surge

South Korea's financial authorities have implemented measures targeting single-stock leveraged Exchange Traded Funds (ETFs), leading to a dramatic decrease in their trading volume. However, this regulatory action has inadvertently created a "balloon effect," with trading activity now concentrating on semiconductor-sector leveraged ETFs.

An analyst from Korea Investment & Securities noted that daily trading volume for single-stock leveraged products has fallen by nearly 90% since the regulations took effect. Conversely, trading in semiconductor sector leveraged ETFs has increased. The KODEX Semiconductor Leverage ETF, for instance, holds significant stakes in Samsung Electronics and SK Hynix, suggesting it is absorbing some of the demand previously directed at individual stock leverage products.

To curb volatility, regulators significantly raised the basic deposit requirement for single-stock leveraged products from 10 million won to 30 million won, demanding the full amount be paid in cash. This move aimed to curb speculative trading in these high-risk instruments.

Furthermore, the analysis points to a growing concern regarding overseas-listed leveraged ETFs. Products like the CSOP SK Hynix Leverage ETF listed in Hong Kong have seen consistent increases in shares. This suggests that global investors, seeing opportunities during market downturns, and domestic investors seeking alternatives, are channeling funds into these foreign-listed products. The emergence of leveraged and inverse ETFs based on Korean stocks, even those listed abroad, could exacerbate domestic market volatility as foreign trading entities pursue momentum strategies.

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(Regulations) have caused daily trading volume for single-stock leveraged products to decrease by nearly 90% from their peak, but trading volume for semiconductor sector leveraged ETFs is increasing.