Leveraged ETFs & bubble risks (with Rebecca Chung Wilkins)

Leveraged single-stock ETFs have become extremely popular in Korea, with retail investors pumping $9 billion into them. These products amplify returns but are designed for short-term trading. SK Hynix and Samsung are starting to trade like meme stocks, with valuation ignored in favor of imagination. A sudden market turn could trigger margin calls and forced selling, potentially traumatizing a new generation of investors. However, the AI boom is unlikely to burst this year as supply-demand dynamics remain tight through 2027.

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Leveraged ETFs & bubble risks (with Rebecca Chung Wilkins)

ndx

We are unlikely to see a bubble burst this year. Supply-demand dynamics are very tight until 2027.

rut

The extreme volatility in Korean and Taiwanese markets (stocks down 20-30% overnight scenario) and the contagion risk to US markets suggests high volatility for small-cap indices.

Leveraged single-stock ETFs track just one stock and use derivatives to magnify returns. They are much riskier than traditional ETFs.

Rebecca Chung Wilkins
Shuli Ren

Leveraged single-stock ETFs amplify exposure to a stock the investor is bullish on. You don't need a margin account or understand options. They trade like stocks, which is why they're very popular.

In Korea, more than a dozen debuted in May. Over 90% of buyers are retail investors who have pumped $9 billion into these products.
Shuli Ren

If you bought a Hong Kong listed 2x leveraged ETF tied to SK Hynix at the beginning of the year, you're up 790%.

Hynix has been doing very well throughout the year.
Shuli Ren

These products are built for short-term trading, not long-term investing. When markets get choppy, even if the underlying stock breaks even, the 2x ETF will still lose money.

If you bought into this ETF at the beginning of June when the stock became volatile, you'd be better off buying the underlying stock.
Shuli Ren

The biggest risk is valuation. Samsung and SK Hynix are starting to trade like meme stocks despite being trillion-dollar companies. Investors are not considering valuation - imagination matters more. If the market turns, retail investors will get margin calls.
Shuli Ren

I heard a teenager from Taiwan say the saying is 'sell your house, sell your cars, and buy TSMC'. Until you sell, these are just paper gains that can evaporate overnight. If returns reverse, you end up with nothing, potentially traumatizing a new generation of investors.

After Japan's bubble burst, Japanese people turned very cautious for decades.
Shuli Ren

Retail investor participation is a global trend - not just in Korea, Taiwan, or US, but also Hong Kong and China. In China, everyone is a retail trader.
Shuli Ren

Foreign investors sold more than $90 billion in Korean stocks and $20 billion in Taiwanese stocks this year. Institutional investors feel overexposed. Retail investors are buying whenever foreigners sell, pushing markets to new record highs.

If there is a real unwind, stocks could be down 20-30% overnight, creating shock to the financial system. If Hynix tumbles 20%, the US market will not open well.
Shuli Ren

We are unlikely to see a bubble burst this year. Supply-demand dynamics are very tight until 2027. Each cycle lasts 3-4 years and we are at year two. When demand peaks and supply-demand mechanics turn against suppliers, valuation will have to fall because these are cyclical industries.

What comes up must come down because supply-demand dynamics change very quickly.

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