Can a fund designed to deliver twice the daily return of a surging chipmaker plunge 27% on the very day the stock jumps 16%? That’s exactly what happened with the KIM ACE SK Hynix Single Stock Leverage ETF in Seoul, leaving traders stunned and raising urgent questions about the safety of leveraged products.
What Went Wrong with the KIM ACE SK Hynix ETF?
The ETF, which promises 2x the daily performance of SK Hynix Inc., moved violently in the opposite direction for two consecutive sessions. On Monday, it soared 50% even as the underlying stock fell nearly 8%. On Tuesday, the dislocation worsened: the ETF cratered 27% while SK Hynix itself rallied 16%.
Korea Investment Management, the fund’s manager, blamed a lack of liquidity during after-hours trading. Bid-ask spreads widened dramatically before the close, when market makers are not obligated to provide quotes. A surge of buy orders then pushed prices to absurd levels, decoupling the ETF from its net asset value (NAV).
The Rise of Single-Stock Leveraged ETFs in Korea
Just launched on May 27, the KIM ACE fund is part of a wave of 16 leveraged products tied to chipmakers that debuted last month. Within a week, their combined assets ballooned from $3 billion to $5.5 billion, fueled by retail frenzy and sharp gains in AI-related stocks.
Unlike their Hong Kong-listed cousins, Korean issuers handle rebalancing in-house. This structure can amplify daily swings when multiple funds move in sync, creating a volatility feedback loop. According to Goldman Sachs, such products act as a “volatility accelerator,” buying into rallies and selling into declines during their mandatory daily rebalancing.
Liquidity Black Holes and Market Maker Limits
The incident exposes a structural vulnerability: ETF liquidity providers are exempt from quoting obligations during pre-open and post-close windows. “Liquidity providers simply can’t be on watch for everything, all the time,” said Jun Gyun, a derivatives analyst at Samsung Securities. “So what happened was rare, but not impossible.”
The Korea Exchange has already flagged three funds, including KIM ACE, for potential investment warnings due to NAV divergence. Korea Investment Management pledged to review its quoting system and “make every effort” to prevent a repeat.
What This Means for Traders and Investors
- Leveraged ETFs are not set-and-forget instruments. Daily rebalancing means returns can deviate wildly from the expected multiple over periods longer than one day.
- Liquidity risk is real, especially in niche products. Thinly traded funds can become unmoored from their NAV during volatile sessions, as seen here.
- Regulatory scrutiny is likely to increase. With $5.5 billion at stake and retail investors bearing the brunt, Korean authorities may impose stricter quoting rules or cooling-off mechanisms.
The KIM ACE debacle is a stark reminder that in the pursuit of outsized returns, the gap between theory and reality can widen into a chasm—often when you least expect it.
