The Bank of Korea issued a warning on single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix in a written Q&A submitted to lawmaker Park Sung-hoon on the 5th. The central bank stated that expanding investment in these ETFs could intensify market concentration and increase stock price volatility, raising financial risks for individual investors. This warning marks a shift in tone from the BOK's June 24 Financial Stability Report, which had emphasized that the market impact of such ETFs would be 'limited.' The change followed Financial Supervisory Service Governor Lee Chan-jin's June 22 press conference remarks expressing personal regret over the ETF approval.
Samsung Electronics and SK Hynix Market Concentration Reaches 55.3%
The BOK stated in the written Q&A that Samsung Electronics and SK Hynix's market capitalization and trading volume now account for more than half of the stock market. As of June 24, the two companies' market cap share in the securities market reached 55.3%, up from 36.1% at year-end. Their trading volume share rose from 27.9% to 63.5% over the same period.
The central bank said, "In a situation where Samsung Electronics and SK Hynix's market cap and trading volume shares have expanded to account for more than half of the stock market, the expansion of single-stock leveraged ETF investment could intensify this concentration phenomenon." It added, "Single-stock leveraged ETFs can intensify trading concentration in one direction as inflow and outflow volumes expand depending on changes in the related business environment or market expectations."
BOK Warns Leveraged ETFs Could Amplify Stock Price Volatility
The BOK stated that single-stock leveraged ETFs could amplify stock price volatility through mechanisms including daily rebalancing and cash-futures arbitrage trading. "When stock prices adjust, not only will individual investors' losses expand, but increased redemptions or position rebalancing could act as factors that amplify stock price volatility," the central bank said.
It explained, "If leveraged ETF investment increases, the possibility of amplifying stock price volatility through daily rebalancing and cash-futures arbitrage trading always exists."
BOK Shifts Stance from June 24 Financial Stability Report
The BOK's current warning contrasts with its June 24 Financial Stability Report assessment. In that report, the central bank had stated that single-stock leveraged ETFs would "contribute to preventing the outflow of domestic investment funds overseas and expanding the inflow of foreign funds by resolving regulatory imbalances with overseas-listed ETFs."
The June 24 report also expressed expectations that "demand for high-risk, high-return investments in domestic blue-chip stocks will be absorbed, leading to the expansion of the domestic stock market base and strengthening of the price discovery function." It had emphasized that "considering the current market cap and trading share of underlying assets, the impact on the market is limited."
FSS Governor Lee Chan-jin had already expressed concerns at a June 22 press conference, stating, "I personally reflect on whether we should have blocked (the ETF introduction) by lying down flat." Lee indicated that while the ETF's effect in bringing funds back from overseas was minimal, the side effects were too large.
Capital Market Research Institute Researcher Comments on Volatility Risks
Lee Hyo-seop, senior research fellow at the Korea Capital Market Institute, stated, "I don't see single-stock leveraged ETFs as the main factor in Korean stock market volatility," but added, "They may have amplified volatility caused by domestic and foreign factors."
He said, "Semiconductor stocks have risen a lot in a short period and could fall at any time," adding, "When stock prices fluctuate, individual investors could increase their losses by averaging down."
The BOK stated it will strengthen monitoring and inspection activities. It said, "We plan to strengthen monitoring and inspection of the impact of single-stock leveraged ETFs on the stock market and financial system," adding, "We will also closely consult with relevant authorities to respond to related risks."
FAQ
What did the Bank of Korea warn about Samsung Electronics and SK Hynix leveraged ETFs?
The Bank of Korea warned in a written Q&A submitted to lawmaker Park Sung-hoon on the 5th that single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix could intensify market concentration and increase stock price volatility. The central bank stated that as of June 24, the two companies' market cap share reached 55.3% and their trading volume share reached 63.5%, and that expanding leveraged ETF investment could worsen this concentration.
How does the BOK's current warning differ from its June 24 Financial Stability Report?
The BOK's June 24 Financial Stability Report had stated that single-stock leveraged ETFs would help prevent domestic fund outflows and that their market impact would be "limited." In contrast, the written Q&A submitted on the 5th warned that these ETFs could intensify market concentration and amplify stock price volatility through mechanisms including daily rebalancing and increased redemptions during price adjustments.
What concerns did the Financial Supervisory Service Governor express about these ETFs?
FSS Governor Lee Chan-jin stated at a June 22 press conference that he personally reflected on whether the ETF introduction should have been blocked. Lee indicated that while the ETF's effect in bringing funds back from overseas was minimal, the side effects were too large.
