The closing figures for the benchmark KOSPI index and shares of SK hynix and Samsung Electronics are displayed on a screen at a dealing room of Hana Bank in Seoul, Friday. Yonhap
The Bank of Korea (BOK) warned Sunday that single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix could amplify market volatility, joining growing regulatory concerns over the high-risk products.
The rare warning is expected to add momentum to financial authorities’ efforts to tighten investment requirements for the products.
In a written response to Rep. Park Sung-hoon of the main opposition People Power Party, the BOK said leveraged ETFs tracking Samsung Electronics and SK hynix could exacerbate the market’s heavy concentration in the two major chipmakers, which account for more than half of the Korean stock market by market capitalization and trading value.
“The domestic stock market has become increasingly concentrated in a handful of semiconductor stocks amid improving earnings in the sector,” the BOK said.
“Single-stock leveraged ETFs could further intensify one-way trading as investors pour money into or pull out of the products in response to changes in market expectations or the business environment.”
The central bank warned that a sharp decline in share prices could magnify losses for retail investors while amplifying market volatility due to increased ETF redemptions and portfolio rebalancing.
On May 27, financial authorities approved Korea’s first single-stock leveraged ETFs, allowing local brokerages to launch 16 products linked to the two tech giants. The products were part of the government’s broader effort to revitalize the domestic capital market.
Unlike conventional leveraged ETFs, which track broader indexes such as the KOSPI 200 or the S&P 500, the products offer leveraged exposure to individual stocks, allowing investors to gain or lose twice the daily return of their underlying shares.
Fueled by artificial intelligence-related chip rally, the products have rapidly gained popularity among investors.
The BOK’s latest remarks mark a notably stronger stance than its financial stability report published on June 24. In that report, the central bank said single-stock leveraged ETFs could “help curb capital outflows by providing domestic alternatives to overseas-listed ETFs, while attracting foreign investment into Korea,” echoing the government’s original rationale for introducing the products.
Bank of Korea Gov. Shin Hyun-song speaks during the European Central Bank Forum in Sintra, Portugal, Wednesday (local time). Courtesy of European Central Bank
But the rapid growth in trading volume has fueled concerns that the products could amplify price swings, with the 14 leveraged ETFs recording a combined 212 trillion won ($138.6 billion) in trading value in June, or 26.6 percent of total ETF turnover.
To maintain their target leverage, such ETFs typically buy more shares when prices rise and sell when prices fall, a mechanism that can reinforce market movements.
The BOK’s latest warning adds to mounting concerns among regulators.
Financial authorities are currently reviewing measures to tighten investment requirements for single-stock leveraged ETFs. With the BOK now publicly voicing similar concerns, discussions on stricter regulations are expected to gather pace.
During a June 22 press conference, Financial Supervisory Service Gov. Lee Chan-jin also said he personally regretted allowing the products to be introduced.
“We rushed the process at the time,” Lee said. “Looking back, I regret approving them. Perhaps I should have done everything I could to stop their approval.”
The debate comes as investors await Samsung Electronics’ second-quarter earnings due Tuesday.
With Samsung Electronics and SK hynix shares becoming increasingly volatile in recent weeks, market watchers said stronger-than-expected earnings could revive optimism over the chip sector and further boost investor appetite for semiconductor-related investment products.