Leveraged SK Hynix ETFs put single-stock fund risks back in focus

Several exchange-traded fund issuers are preparing U.S. products linked to SK Hynix that would let investors take leveraged positions in the South Korean chipmaker, CNBC reported. The planned launches, expected next week from firms including GraniteShares and ProShares, follow SK Hynix’s U.S. trading debut on Friday and add to a market segment that has shifted ETFs beyond their broad-index origins.

Single-stock ETFs use derivatives and financing arrangements to deliver amplified exposure, often seeking two times or inverse daily performance on one company’s shares. That structure can make them easier to trade than margin accounts or options for some investors, but it also means gains and losses can diverge sharply from the underlying stock over time, particularly when prices move erratically.

SK Hynix is already the subject of popular ETF trades in South Korea, according to CNBC. The company’s chairman told CNBC that U.S. investor demand for the stock, which had lacked a domestic listing, is “enormous.”

The prospective products arrive after a long expansion in ETFs built mainly around low-cost, tax-efficient access to diversified benchmarks such as the S&P 500. More recent growth has included single-stock funds tied to high-profile technology and momentum names, including Nvidia, Tesla, Apple and SpaceX.

CNBC reported that SpaceX shares fell below their first-day opening price earlier this week and were down roughly 8% from the company’s IPO, a move it described as not unusual for a new issue.

Experts warn on leverage buildup

Mike Akins, founding partner of ETF Action, told CNBC’s “ETF Edge” that leverage in ETFs is “getting a little carried away.” He said most funds perform as described, including products offering twice the exposure to a memory-chip stock or inverse exposure to it, but questioned whether every strategy belongs inside a regulated ETF.

“It’s not that the products are bad,” Akins said on the programme, according to CNBC. He added that some structures may be difficult for the broader market to absorb if leverage accumulates across many funds and securities.

Alex Morris, chief executive and chief investment officer of F/M Investments, told CNBC that his firm has passed on some ETF concepts because of limited liquidity, leverage, options use and the challenge of explaining risks clearly to investors. He said investors seeking very high leverage may find futures or options markets more suitable, though he also noted that ETFs can reduce paperwork and disclosure burdens compared with those markets.

Akins said an ETF may be a safer tool than a margin account for an investor seeking two-times exposure to a stock ahead of earnings. Morris, however, warned that investors can misread leveraged single-stock ETFs as a way to magnify a trade they see as certain.

Leveraged long ETFs do not work like a conventional margin position, Morris said. A margin account can trigger calls for additional collateral, while a long-only two-times ETF position can see its net asset value move toward zero if the investor holds it through adverse moves. He said an investor may find that the share price has risen over a period while the leveraged ETF position is still down, reflecting compounding and daily reset effects.

Regulators seek views

The Securities and Exchange Commission said on June 30 that it is seeking public comment on ETF innovation and “novel investment strategies.” CNBC reported that many market participants expect attention to fall heavily on prediction-market ETFs, another fast-growing area that uses derivatives, rather than only on single-stock funds.

Morris told CNBC that the SEC is asking appropriate questions about how ETFs evolved from passive, low-cost products into vehicles for a wide range of speculative exposures. He said he does not expect ETFs to cause a systemic market event, but added that the next external market shock could test riskier products quickly.

He also said the commercial incentives remain strong for more leveraged single-name products. “The raw capital says they should keep going, and they will,” Morris told CNBC.

This story draws on original reporting from CNBC.