One of the hottest artificial-intelligence stocks in South Korea is increasingly being driven by demand for products built on top of it.
A wave of leveraged exchange-traded funds tied to SK Hynix Inc. has unleashed so much derivatives activity that the products and their associated hedging flows now account for an estimated 60% to 70% of trading in the chipmaker’s shares, according to Leverage Shares analyst Sandeep Rao.
The phenomenon highlights how enthusiasm for AI has evolved from investors buying stocks to leveraged ETFs increasingly taking up a larger share of the activity. In SK Hynix, whose shares have surged about 780% over the past year, the resulting options trading is becoming large enough that some market participants say flows could matter as much as the company’s fundamentals.
“Flows in SK Hynix stock are increasingly from leveraged ETF flows and not from interest in the company’s stock,” Rao said. “The cash equity market is now, in a meaningful sense, the tail being wagged by the leveraged ETF dog and not the other way around.”
Korean issuers last month launched a wave of leveraged ETFs tied to the stock, following the success of a fund introduced in Hong Kong last October. To maintain their targeted returns, the products must rebalance daily using derivatives, generating additional trading in the underlying stock and options market.
The number of SK Hynix options outstanding jumped almost 17-fold in about a month to a record high on Tuesday. Large blocks of call options have also begun appearing after the close of normal trading hours.
“Some of the heavy call activity in SK Hynix may have reflected the mechanics of leveraged products and their hedging requirements, which can amplify both rallies and corrections when positioning is being adjusted.” said Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist.
The rise of leveraged ETFs has long raised concerns about their effect on underlying assets. Those worries are particularly acute in South Korea, where SK Hynix accounts for almost one-fourth of the benchmark Kospi index’s weighting. The chief investment officer of CSOP Asset Management Ltd., manager of a roughly $10 billion leveraged ETF tracking SK Hynix, has said the fund’s daily rebalancing has a limited market impact .
Still, Goldman Sachs Group Inc.’s sales desk described the new Korean leveraged ETFs as potential volatility accelerators shortly after their launch. On Monday, as SK Hynix tumbled as much as 11%, options trading topped 400,000 contracts, a level of activity that Samsung Electronics Co. hasn’t seen since 2017.
“The broader market implication is that SK Hynix is another example of how AI and memory leadership has moved beyond fundamentals alone,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “That does not mean the move is disconnected from fundamentals, but it does mean the stock may trade with more momentum and more intraday volatility than the fundamentals alone would imply.”