Two consecutive days of "reverse clubbing"! SK Hynix soars 13%, 2x leveraged ETF plunges 40%

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A leveraged single-stock ETF tracking SK Hynix in South Korea experienced directional dislocation for two consecutive trading days, once again drawing heightened market attention to the structural risks of such products.

The KIM ACE SK Hynix ETF, which provides 2x long exposure to SK Hynix, plunged nearly 40% at one point on Tuesday, while SK Hynix shares posted double-digit gains. On the previous trading day, the ETF soared 50% in defiance of SK Hynix’s nearly 8% decline.

The cumulative deviation over the two days was astonishing to the market. The Korea Exchange has listed three funds, including KIM ACE, as potential investment warning candidates, citing significant deviation between their net asset values and market prices.

Korea Investment Management Co., which manages the ETF, attributed Monday’s anomaly to a malfunction in the liquidity provider’s quotation system, adding it will thoroughly review related mechanisms and “do everything possible” to prevent recurrence. This incident not only subjects the company to stricter regulatory scrutiny, but also casts a shadow over the rapid expansion of Korea’s single-stock leveraged ETF market.

Back-to-back Contradictory Moves

The KIM ACE SK Hynix single-stock leveraged ETF is designed to provide double the daily return of SK Hynix shares. However, the product experienced substantial swings in the opposite direction of its underlying stock for two consecutive trading days.

On Monday, SK Hynix shares fell nearly 8% in a single day, yet the ETF defied the trend, closing up 50% to a record high of 30,000 won. Based on its 2x leverage design, it should theoretically have posted around a 15% loss that day. During the same period, other single-stock leveraged ETFs tracking SK Hynix declined as expected, with only KIM ACE behaving abnormally.

On Tuesday, the situation reversed again. By the close of the Korean stock market, SK Hynix had surged about 16%, while the ETF plunged 27%, once again moving contrary to its underlying.

Jung In Yun, CEO of Fibonacci Asset Management, said, "Such price dislocations are rare but not unprecedented. ETFs typically rely on market makers to maintain consistency between prices and underlying assets, but during closing auction periods, this safeguard can weaken—especially for niche products with limited trading volume."

Liquidity Vacuum Is the Root Cause

Korea Investment Management explained in a text statement on Monday that as market close approaches, liquidity providers are no longer obligated to submit quotes, causing bid-ask spreads to widen sharply. Amid violent price swings, investors’ market buy orders were executed, resulting in a rapid surge in the ETF price.

The fund’s authorized participants and liquidity provider list includes five local brokers, such as Mirae Asset Securities Co. and Kiwoom Securities Co.

Jun Gyun, a derivatives analyst at Samsung Securities, noted that ETF market makers have no quoting obligations before the market opens and after it closes—this is precisely when liquidity can virtually disappear. “ETF liquidity providers cannot monitor all scenarios at all times,” he said. “So, what happened this time is rare, but not impossible.”

Francis Oh, head of Asia business development at Rex Financial, pointed out that unlike similar products listed in Hong Kong, Korean issuers handle rebalancing operations internally, which may amplify intraday volatility of underlying stocks when multiple products move in the same direction.

Hundred Billion Scale Expansion Raises Structural Concerns

The KIM ACE SK Hynix ETF is one of a batch of single-stock leveraged ETFs that concentratedly launched in Korea last month. According to Bloomberg industry research data, 16 such products were listed on May 27th, with a total asset size of $3 billion, ballooning quickly to $5.5 billion within a week due to capital inflows and surging underlying stocks.

These products use derivatives and swap contracts to offer magnified returns for investors, but can also exacerbate price swings for heavily weighted stocks. Issuers tend to buy and sell assets quickly to maintain consistency with their promised leverage ratios.

According to a Goldman Sachs sales team report last month, rebalancing flows associated with such products were already considered one of the drivers of recent market volatility—these funds chase gains on the way up and accelerate losses on the way down, thus acting as a “volatility accelerator.”

On Monday, the Korean stock market itself experienced turbulence: the benchmark Kospi index briefly plunged nearly 9% during trading, triggering a 20-minute circuit breaker, and small-cap market Kosdaq also halted afternoon trading. In this context, the sudden disappearance of liquidity made ETF mispricing issues stand out even more.

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