The iShares MSCI South Korea ETF (NYSE:EWY), which gives American investors an easy way to invest in top South Korean companies, has come under pressure this month. It has already dropped nearly 20% from its highest point this year, and its outflows have started rising.
EWY ETF Outflows are Rising
There are signs that investors are dumping popular South Korean stocks as the recent rally stalls. The Kospi Index, which tracks the biggest companies in the country, has dropped by over 27% from its highest point this year.
Data shows that the EWY ETF had over $423 million in outflows last week, after losing more than $269 million the previous week. Despite these outflows, the fund has attracted over $9.4 billion in inflows this year, helped by rising demand for technology companies like Samsung Electronics and SK Hynix.
The outflows are happening as the two companies, which account for over 43% of the fund, have dropped by double digits in the past few months. Samsung Electronics dropped from a record high of 374,000 to 257,000 today. Similarly, SK Hynix has fallen by over 40% from its all-time high. SK Square, which has a large stake in SK Hynix, has dropped by 52% from its peak.
The two technology companies have plunged even after they released strong financial numbers, with their revenues and profits soaring by triple digits. This growth will likely continue in the coming years as demand for memory products remain elevated.
As a result, they have embarked on substantial returns. Samsung has announced plans to repurchase shares worth over $80 billion, while SK Hynix is repurchasing shares worth nearly $30 billion.
Unwinding of Leveraged Trades
One main reason why EWY ETF and top memory companies like Samsung Electronics and Samsung are struggling is that South Koreans are unwinding their leveraged positions.
According to Bloomberg, leveraged ETFs targeting twice the daily returns of the two companies have seen their trading volume drop to 4% of the June peak. Most notably, these funds are on track for the first monthly outflow, partly because of the ongoing regulatory tightening.
South Korea’s financial regulator has unveiled measures to have traders complete five-day simulated trading. To do this, they have to download a PC software and spend at least an hoir a day learning the ropes and risks of leveraged trading. Many traders see these rules as being highly cumbersome to meet.
These rules are meant to protect the many retail traders who have lost fortunes when their bets on the two companies backfired. This is also what happened with Situational Awareness, a hedge fund that erased most of its gains and had to be rescued.
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