SINGAPORE, July 29 (Reuters) - Single-stock leveraged ETFs, launched in the United States in 2022, have boomed in Asia as a way to juice bets on South Korean chipmakers Samsung Electronics ( SSNLF ) and SK Hynix ( SKHY ).

But they are driving so much money that they are reshaping the market, fuelling volatility, and worrying regulators - especially as the double-edged instruments can amplify market falls.

HOW DOES A LEVERAGED ETF WORK?

Since the 1990s, exchange-traded funds have offered investors a low-cost way to buy baskets of stocks and trade them like shares on a brokerage account.

Leveraged ETFs, nearly two decades old, promise to multiply the daily returns of their targets, and have recently exploded in popularity, particularly around the AI theme and some companies at the forefront of hardware sales.

Such ETFs use futures or swaps to replicate a bet using borrowed money to multiply the daily return of their target by typically two, three or even five times - amplifying gains on the way up and losses on the way down.

Single-stock leveraged ETFs launched in May in South Korea, though two-times leveraged ETFs tracking Samsung and SK Hynix ( SKHY ) listed in Hong Kong in 2025 and have seen their assets under management balloon.

Assets in the latter fund tracking SK Hynix ( SKHY ) surged 20-fold to a peak in late June, before sliding precipitously.

When investors buy a unit in these products, the funds need to buy shares in the underlying stocks as well as derivatives to leverage the performance. If the stock moves up, the ETF needs to buy more and if it falls, it must sell.

Those daily rebalancing trades generate a feedback loop, exacerbating moves in either direction and ramping up volatility.

WHO IS TRADING THEM?

Asset managers selling the products say they represent a lower-cost hedging tool aimed at professional traders and sophisticated investors, with many products blanketed in disclaimers that they are not suitable for buy-and-hold investors. 

The expense of maintaining a leveraged position erodes returns over time, meaning they often diverge substantially from their target investments. Nevertheless, many retail investors have been happy to pile in to chase the gains.

WHAT IS HAPPENING IN SOUTH KOREA?

In South Korea, everything is amplified by the sheer size of the ETF flows and of the stocks in question, with SK Hynix ( SKHY ) and Samsung each commanding trillion-dollar market caps and comprising more than half of the benchmark KOSPI index.

The combination is "creating an incredible feedback loop that's driving volatility in the semiconductor space," said Michael Green, chief strategist and portfolio manager for Simplify Asset Management.

"That's driving elevated levels of volatility on a single-stock level."

The Hong Kong-listed twice-leveraged ETF tracking SK Hynix ( SKHY ) offered by fund manager CSOP, which has grown into the biggest fund of its type globally, has plunged 83% during the past month since peaking in late June, but still holds HK$31.9 billion ($4 billion) in assets, according to HKEX data.

Its flows helped SK Hynix's ( SKHY ) stock price soar, but have lately accelerated selling and by late July the stock had halved from a peak in late June.

The stock, along with Samsung, accounts for more than 80% of the trading volume of the KOSPI on some days this year, according to calculations by Reuters.

The KOSPI's volatility index has spent the past six weeks above 80, with a record high of 97.99 on June 19, after decades spent comfortably perched below 30.

SK Hynix's ( SKHY ) Nasdaq debut in July injected another source of volatility, with a wave of new leveraged ETF listings in the United States

WHAT ARE AUTHORITIES SAYING?

South Korea's top financial regulator, the Financial Services Commission unveiled new measures on single-stock leveraged ETFs, including banning promotional events and advising against new launches in July.

The finance minister later apologised in the National Assembly for lack of careful consideration before the launch of the products, opening the door to further regulatory tightening.

Hong Kong's market regulator has also tried to dampen leveraged ETF volatility, by requiring managers such as CSOP to operate leverage dynamically, capping it at 2X but letting it run lower when markets are swinging wildly.

($1=HK$7.8427)