Single-stock leveraged ETFs tracking SK Hynix and Samsung Electronics experienced abnormal price divergence during closing auction periods on the 6th and 8th, with tracking errors exceeding 1% as market volatility intensified, according to Korea Exchange data released on the 8th. The divergence stemmed from rapid changes in estimated net asset value (iNAV) as underlying stock prices fluctuated during closing auctions, combined with large buy and sell orders concentrated in the final trading minutes. Industry officials noted that the tracking error problem, compounded by the negative compounding effect inherent in leveraged products, has resulted in cumulative investor losses significantly exceeding twice the underlying stock declines, prompting calls for regulatory review of ETF pricing mechanisms during closing auction periods.
SK Hynix Stocks Leveraged ETFs Drop Over 8% on the 6th
On the 6th, SK Hynix stocks fell 3.38% to close at 2,343,000 won after declining as much as 5.9% during the closing auction period, having traded down only 2-3% during regular trading hours. ACE SK Hynix Single Stock Leverage ETF dropped 8.45% on the same day, while TIGER SK Hynix Single Stock Leverage, RISE SK Hynix Single Stock Leverage, and SOL SK Hynix Single Stock Leverage all declined more than 8%. An asset management company official stated that during closing auction periods, the underlying asset's expected settlement price continuously changes, causing iNAV to fluctuate in real time, and liquidity providers' bid-ask quotes adjust accordingly based on iNAV, meaning the underlying asset's volatility can affect leveraged ETF tracking error.
ACE SK Hynix ETF Records 90.18% Tracking Error on the 8th of Last Month
On the 8th of last month, large buy orders entered ACE SK Hynix Single Stock Leverage during the closing auction period, resulting in a tracking error of 90.18%. Despite SK Hynix stocks falling 7.68%, the ETF surged 49.7%. The following day, the effect continued as SK Hynix stocks jumped 15.91% but the ETF plunged 27.03%. Large buy and sell orders concentrated during closing auction periods contribute to widening ETF tracking errors. Recent closing auction tracking errors for some single-stock leveraged ETFs have continued to exceed 1%.
SK Hynix and Samsung Stocks Leveraged ETFs Fall 34.25% and 20.58% from 30th to 7th
From the 30th of last month to the 7th of this month, SK Hynix stocks and Samsung Electronics stocks fell 16.25% and 8.36% respectively. During the same period, spot-based single-stock leveraged ETFs tracking these stocks, which aim to deliver twice the daily return of the underlying assets, declined more than 32.5% and 16.72%—double the stock declines. ACE SK Hynix Single Stock Leverage fell 34.25%, the largest decline among SK Hynix single-stock leverage ETFs. KODEX Samsung Electronics Single Stock Leverage dropped 20.58%, the steepest fall among Samsung Electronics single-stock ETFs. The leveraged ETFs' declines exceeding twice the underlying stocks' losses resulted from tracking error and negative compounding effect. The negative compounding effect intensifies during volatile markets. Because leveraged products track twice the daily fluctuation of the underlying asset, principal erodes as prices rise and fall, potentially increasing losses with longer holding periods. An industry official stated that while closing auction tracking error increases and negative compounding effects in leveraged products have been longstanding issues, the problem has grown larger for single-stock leveraged ETFs due to high retail investor participation and trading volume, adding that institutional improvements are needed after examining multiple factors including ETF pricing during closing auction periods.
FAQ
Why did SK Hynix stocks leveraged ETFs fall more than twice the stock decline from the 30th to the 7th?
The leveraged ETFs fell 34.25% while SK Hynix stocks dropped 16.25% due to tracking error and negative compounding effect. During volatile markets, the negative compounding effect intensifies because leveraged products track twice the daily fluctuation, causing principal erosion as prices rise and fall, which increases losses with longer holding periods.
What caused the 90.18% tracking error in ACE SK Hynix ETF on the 8th of last month?
Large buy orders entered the ETF during the closing auction period on the 8th of last month, creating a 90.18% tracking error. This caused the ETF to surge 49.7% despite SK Hynix stocks falling 7.68%, and the following day the ETF plunged 27.03% even as SK Hynix stocks jumped 15.91%.
