Asset managers see robust interest in leveraged Samsung, SK hynix ETFs

Single-stock leveraged exchange-traded funds (ETF) will debut in Korea on Wednesday, a move that could amplify volatility in the Kospi while giving investors a new way to make aggressive bets on two of the market’s most sought-after stocks: Samsung Electronics and SK hynix.

Eight asset managers, including Mirae Asset and Samsung Asset Management, are launching products tracking twice the daily price movements of the two chipmakers on the Korea Exchange, which could theoretically lead to up to 60 percent in gains or losses in a single day, double the 30 percent limit for a single stock.

Major asset managers are taking different approaches to attract investors. Samsung Asset Management said it reduced hidden costs by structuring its ETFs’ creation and redemption process on an in-kind basis, while Mirae Asset Management said its products use a cash-based creation and redemption structure to provide ample liquidity.

“In an in-kind structure, the asset manager and liquidity providers exchange the underlying stocks directly, rather than cash, during the creation and redemption process, allowing investors to avoid the 0.2 percent securities transaction tax incurred when selling shares,” said Imm Tai-hyuk, managing director of ETF management at Samsung Asset Management, during a press conference held in central Seoul on Tuesday.

“It could generate annual trading cost savings of about 1.1 percent to 1.4 percent compared to a cash-based structure,” Imm said, adding that the firm has secured 25 authorized participants and 15 liquidity providers, the largest in the industry, as another key advantage.

Mirae explained the mechanism differently.

“In a cash-based structure, the securities transaction tax is borne by the fund, whereas in an in-kind structure it is effectively borne by liquidity providers,” said Kim Nam-ki, head of ETF management at Mirae Asset Global Investments, during a press conference in central Seoul on the same day. He added that requiring liquidity providers to bear securities transaction taxes and holding costs could constrain pricing.

Mirae Asset also said it secured 329 billion won ($220 million) in initial aggregate subscriptions from foreign investors in its single-stock leveraged ETFs, the largest among ETFs listed in Korea, a scale it expects will provide ample liquidity.

“The original purpose of introducing single-stock leveraged products was to stabilize the dollar-won exchange rate, and we accordingly benchmarked our competition not against domestic asset managers but against global firms offering single-stock leveraged products overseas,” he added.

Single-stock leveraged ETFs tracking Samsung Electronics and SK hynix have proved popular among Korean investors abroad, a trend that was among the key factors behind financial authorities’ decision to allow their listing in an effort to attract more capital into the local market.

The combined net asset value of these products reached $4.4 billion, with Korean investors holding $192.88 million, according to Yoon Jae-hong, an investment strategy analyst at Mirae Asset Securities, in a report published early May. He added that inflows into Korea’s single-stock leveraged ETFs could range from 1.7 trillion won to won 5.3 trillion, based on the size of the domestic ETF market and retail investors’ trading patterns.

Samsung’s initial subscription size totaled 2.4 trillion won, with a management fee of 0.29 percent, while Mirae Asset’s stood at 1.3 trillion won with a fee of 0.09 percent.

Other brokerages offering the single-stock leveraged ETFs include KB Asset Management and Shinhan Asset Management.

BY JIN MIN-JI [[email protected]]