Wall Street Wolves, Stop Charging into 2x and 3x SK Hynix

Original | Odaily Planet Daily (++@OdailyChina++)

Author | Azuma (++@azuma_eth++)

If you were to ask what the most talked-about concept in the global capital markets this year is, the answer would undoubtedly be storage.

As the construction of AI infrastructure continues to advance, HBM (High Bandwidth Memory) is in short supply, and the three major storage manufacturers—SK Hynix, Samsung, and Micron—have become the focal point of market enthusiasm. The influx of capital has driven their stock prices to soar rapidly, and even though there has been a significant correction recently, the year-to-date gains remain quite impressive.

When a stock keeps rising, there will always be someone in the market who thinks, "It’s not rising fast enough," leading to a relatively niche product rapidly entering investors' sights—Single Stock Leveraged ETFs. Unlike traditional ETFs that track a basket of stocks or indices, these products only track a single stock and amplify the daily price fluctuations of the stock by 2x or even 3x through swaps, futures, and other financial derivatives. In other words, if the underlying stock rises by 10% in a day, the corresponding 2x leveraged ETF would theoretically rise by about 20%; conversely, if the stock falls by 10%, the product would also incur a loss of about 20%.

For this reason, Single Stock Leveraged ETFs are becoming a new tool for an increasing number of aggressive investors betting on popular AI stocks. Since the beginning of this year, as hot money has continuously flowed in hoping to amplify returns through AI and storage trends, the scale of Single Stock Leveraged ETFs launched around popular AI concept companies like SK Hynix has been expanding.

However, what many investors overlook is that the other side of amplified returns is that risks are also magnified by the same multiples—under extreme market conditions, the underlying stock may rebound, but the Single Stock Leveraged ETF might not even have the chance to wait for a rebound.

A Fresh Case: The Delisting Journey of a 2x Leveraged ETF

Don’t think this is an alarmist statement; a recent incident in the U.S. stock market is enough to reveal how dangerous Single Stock Leveraged ETFs can be.

The above chart shows the recent stock price trend of the American electric vehicle manufacturer Lucid (LUID). On July 14, local time, rumors suddenly circulated in the U.S. stock market that Lucid was considering filing for bankruptcy. Affected by this negative news, LUID’s stock price plummeted by 57%, triggering multiple circuit breakers during the trading session and marking the largest intraday drop since its listing.

However, the plot quickly reversed. Lucid subsequently issued a statement indicating that the company had indeed hired consulting firm AlixPartners to conduct a comprehensive review of its operations to optimize operations, cut costs, and advance new model development, and that the rumors regarding bankruptcy were "completely unfounded." Lucid also emphasized that it currently has sufficient liquidity to support operations until next year, and AlixPartners is only responsible for operational optimization and has not made any bankruptcy recommendations to the management or board.

As Lucid urgently refuted the rumors, market sentiment quickly recovered, and Lucid’s stock price rebounded from its intraday low, ultimately closing with a drop of about 16%. For investors holding Lucid stock, this felt more like a thrilling "roller coaster" ride.

However, for another group of investors, the story ended at the moment of the crash.

During Lucid’s sharp decline, the 2x long ETF tracking its stock price performance—GraniteShares 2x Long LCID Daily ETF (LCDL)—faced a total liquidation. The fund manager GraniteShares subsequently announced that the fund had liquidated all LCID positions that day, as the net asset value had fallen to negative, and it would officially initiate the delisting process.

This means that when Lucid’s stock price quickly rebounded afterward, this ETF had no positions left to recover its net asset value. For all users holding LCDL, there was no longer any opportunity to participate in the subsequent rise of LCID.

This is precisely what distinguishes Single Stock Leveraged ETFs from ordinary stocks. Even if a stock experiences a sharp decline, as long as the company still exists, investors still have the chance to wait for a rebound; but once a Single Stock Leveraged ETF "triggers a death mechanism" during extreme volatility, even if the underlying stock recovers, investors may never see that day.

Social Issues on the Rise, South Korean Government Begins to Worry

The delisting of LCDL is by no means an isolated case. In fact, as Single Stock Leveraged ETFs rapidly proliferate among popular AI stocks, regulators have begun to reassess the systemic risks that these products may pose.

Among them, South Korea's stance is particularly representative.

In mid-July, according to the Korea Times, the four major financial departments—South Korea’s Ministry of Finance and Economy, Financial Services Commission, Financial Supervisory Service, and the Bank of Korea—will hold a special meeting under the government’s macroeconomic and financial coordination mechanism (F4) to discuss the risks and regulatory measures of Single Stock Leveraged ETFs. The discussions will include raising margin requirements, limiting daily price fluctuations, and reducing leverage ratios.

In recent years, as retail investors in South Korea have continuously flocked to the stock market, the AI trend has almost evolved into a nationwide investment craze among South Koreans. Major stocks like Samsung Electronics and SK Hynix have become the focus of capital chasing, while leveraged ETFs launched around these stocks have further amplified market sentiment and stock price volatility. Regulators are concerned that as more and more investors begin to use high-leverage products to chase popular stocks, the impact of a severe fluctuation is no longer just a change in numbers in investment accounts but may further evolve into social issues.

As the storage concept faces pressure and correction, the South Korean capital market has seen multiple extreme incidents. On one hand, rumors of suicides due to stock investment failures have emerged on social media; the Chosun Ilbo reported yesterday that a YouTuber with a stock investment channel was stabbed multiple times on the street by a man in his twenties, with preliminary police investigations indicating that the suspect was a subscriber of the channel who suffered significant losses after believing the blogger's stock investment recommendations, leading to resentment and the attack.

Although the aforementioned incidents were not directly caused by Single Stock Leveraged ETFs, the signals they send to regulators are highly consistent—when high-risk investment tools continuously lower participation thresholds and overlap with social media and live stock recommendation channels, financial risks may ultimately spill over into social risks.

For the South Korean government, this is the most terrifying thing.