[Edaily Reporter Shin Ha-yeon] Three leveraged exchange-traded funds (ETFs) that track SK Hynix stock prices at double the rate have been designated as “cautionary stocks” by the Korea Exchange. This follows a sharp widening of the spread between net asset value and market price in some ETFs just before the market closed the previous day.

According to the Korea Exchange on the 9th, three ETFs—ACE SK Hynix Single Stock Leverage, 1Q SK Hynix Futures Single Stock Leverage, and KIWOOM SK Hynix Futures Single Stock Leverage—were designated as "Investment Caution" securities around 9 p.m. the previous day.

These products are ETFs that track the return on SK Hynix’s stock price by a factor of two in the same direction. Their structure is designed to generate returns at twice the level of SK Hynix’s stock price appreciation.

The exchange explained in a public notice, “At the close of trading, the real-time tracking error exceeded twice the regulatory threshold for mandatory management.” The tracking error refers to the difference between an ETF’s market price and its net asset value (NAV). Typically, ETFs are managed to prevent excessive divergence between NAV and market price through quotes submitted by liquidity providers (LPs).

Under the KOSPI Market Operating Rules, the process for designating a security as a “cautionary investment” proceeds in the following order: identification → preliminary designation notice → designation. First, if circumstances requiring investor caution—such as a widening price deviation—arise, the security is identified as a cautionary investment. If the same circumstances recur within 10 trading days starting from the next trading day, the security undergoes the preliminary designation notice procedure.

If the widening of the deviation ratio or similar issues persist even after the pre-designation notice, the security may be designated as an “Investor Caution Stock.” Once designated, single-price trading in three-day intervals may be applied, and trading may be suspended depending on the circumstances.

This designation is believed to be a result of abnormal trading that occurred in certain single-stock leveraged ETFs toward the end of the previous trading day. While SK Hynix’s stock price plummeted by nearly 8% the previous day, the ACE SK Hynix Single-Stock Leveraged ETF showed an unusual trend, surging by approximately 50% toward the end of the session.

This is understood to have occurred because, during the closing price formation period when LPs are not required to submit quotes, a quote gap emerged, and market orders from some investors were executed at high prices.

Currently, LPs submit quotes to manage the tracking error of ETFs during trading hours, but they are exempt from this obligation during the closing price single-price trading session from 3:20 p.m. to 3:30 p.m.

An exchange official stated, “It appears that single-stock leveraged ETFs were flagged as ‘cautionary securities’ due to orders executed during the closing price formation period the previous day, when LP quote obligations were not in effect.”