A single-stock leveraged exchange-traded fund (ETF) that has increased volatility among semiconductor stocks in the Korean market is showing signs of spreading to Japan. Concerns are rising that the launch of products tracking Kioxia Holdings' daily stock returns at double or negative double rates in the U.S. could further amplify volatility.
According to Bloomberg on the 26th, U.S. asset management firms including Cogent Strategies, GraniteShares Advisors, and Turtle Capital Management are preparing to launch single-stock leveraged ETFs based on Kioxia shares or American Depositary Receipts (ADRs).
Documents submitted to U.S. financial authorities indicate that at least nine ETFs are awaiting approval, designed to track Kioxia's daily returns at double rates or to generate double returns when the stock price declines. According to Bloomberg, Kioxia is the first Japanese company to serve as the underlying asset for a single-stock leveraged ETF.
Turtle Capital plans to launch the 'T-Rex 2x Long Kioxia Daily Target ETF' as early as next month. Matthew Turtle, CEO of Turtle Capital, stated, "There are many interesting Japanese companies that U.S. investors want to access, and Japan will be the next wave of single-stock leveraged products."
The issue is that Kioxia is already one of the most volatile companies among major Japanese stocks. Kioxia reached the top of Japan's market capitalization in early June, driven by expectations for AI semiconductor investments, but its market cap quickly halved as concerns over AI investment overheating spread.
Experts warn that once single-stock leveraged ETFs begin trading, Kioxia's stock price fluctuations could be further amplified. Leveraged ETFs adjust their holdings of stocks, futures, options, and swaps daily to track the underlying asset's daily returns at a certain multiple.
This process involves buying more of the underlying asset when the stock price rises and reducing holdings when the price falls. Bloomberg explains that if hedge funds and market makers engage in trading ahead of expected rebalancing, existing price trends could be significantly magnified in one direction.
Andrew Jackson, head of Japanese equity strategy at Ortus Advisors, noted, "Leveraged ETFs distort normal market functioning and significantly increase volatility, especially amplifying excessive movements seen in AI-related stocks."
The Korean market is cited as having experienced the side effects of single-stock leveraged products first. Large amounts of capital flowed into products tracking Samsung Electronics and SK Hynix, increasing volatility in related stocks, prompting Korean financial authorities to halt new listings of single-stock products.
Over the past 30 trading days, the annualized volatility of the KOSPI index has exceeded 75%. In comparison, the Nikkei 225 index has seen volatility at 37%, the Hong Kong Hang Seng index at 22%, and the U.S. S&P 500 index at 13%.
In Japan, the listing of leveraged ETFs tracking individual stocks is not permitted due to failure to meet diversification requirements. However, Japanese investors can trade related products listed on overseas markets, including the U.S., through local securities firms.
The interest of U.S. asset managers is not limited to Kioxia. They are also preparing to launch single-stock leveraged ETFs tracking SoftBank Group, Nintendo, Tokyo Electron, Toyota Motor, Fujikura, and Lasertec.
* This article has been translated by AI.
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