South Korea’s market sell-off sparks investor fears in ETFs

00:00 Speaker A

SK Hynix’s Korean shares are pairing back their losses from earlier in the week after a widespread sell-off in South Korean markets. Of course, this created ripple effects to ETF markets as investors faltered from exposure to leverage funds in the Korean market. My next guest says with SK Hynix’s Nasdaq listing, US investors may see the same fate.

00:23 Speaker A

Joining me now, Cynthia Murphy, Vetify investment strategist for this week’s ETF report brought to you by Pimco.

00:30 Speaker A

Cynthia, um there has been a lot more tension, obviously, um towards the South Korean markets generally and towards leveraged ETFs specifically and the sort of ripple effect. So, at this point, now that we’re sort of maybe past the worst of the sell-off or one of the, I don’t know, well, that’s not to say that there couldn’t be more. But like what do we need to be watching most closely to see what the the impact is going to be?

01:10 Cynthia Murphy

Yeah, it was uh I guess they’ve been calling it the Black Monday in South Korean markets and we immediately went to what I’m thinking of as Sunny Tuesday. The quick recovery has been amazing. And if you think about it, Julie, that’s been kind of the story in some of these AI stocks. Uh it’s been feast and famine, feast and famine, and the momentum is so so quick in these stocks and the ups and downs are so dramatic. There’s no way things that happen in a global market uh outside the US wouldn’t impact US investors as well. If we look at asset flows this year into the AI space, into the single stock space, into the leverage single stock space, the amount of money chasing these names is so high that any of these price shocks are immediately felt here.

02:08 Cynthia Murphy

So there’s no way US investors can escape this kind of volatility. And now that we have we just launched this week a a bunch of 2X SK Hix uh SK Hix ETFs, it is just going to continue.

02:22 Speaker A

Has there been any slowdown at all into in inflows into the leverage product specifically, whether we’re talking about South Korea or here in the US?

02:35 Cynthia Murphy

It hasn’t actually. It’s it’s amazing the appetite for single stock leverage exposure. It’s been something we’ve all been marveling at. Uh there’s a growing conversation which I’m sure you’ve been following about are these things going to start distorting price discovery because the volume is so large, the demand is so large. But it’s interesting because the volatility has been so big and these price shocks are so dramatic that we’re seeing the flip side of that is this growing appetite for diversification as well.

03:22 Cynthia Murphy

So it’s it’s a little bit like we can’t give up on this gravy train of the single stock play. that risk has been so compelling for a lot of folks, but also the heartburn is so intense that we’re seeing a push towards diversification as well.

03:45 Speaker A

So, let’s talk a little bit more about the diversification then because I know you’re watching inflows into sort of global AI, not, I mean, yes, in South Korea, but elsewhere also. So what kinds of trends are you seeing there?

04:00 Cynthia Murphy

So what we see is portfolios uh that take care of the entire AI value chain. So if you think for example uh an ETF like THNK, uh in a way uh artificial intelligence ETF, think is the is the ticker. You you have in there, you have your hardware names, you have your software names, you have your cybersecurity names, you have adopters, you have data platforms, you have the cloud. So, it’s it’s part of not trying to time who’s the winner, who’s the leader, who’s going to be the laggard because we don’t know. There’s so many parts of this AI story. It’s just that idea of owning the entire va value chain of AI. And we’re seeing and there’s a lot of funds in these categories and we’re seeing all of them find assets, find traction as folks try to diversify that single stock risk because, you know, a stock leads today, lags tomorrow, leads again the day after, it’s too much volatility for a lot of investors.

05:01 Speaker A

Um and and speaking about diversification, one of the areas that had been sort of the old reliable of diversification was gold, right? And the gold ETF which um we know had done very well last year. Um what are we seeing this year? Is there any kind of change in that trend of outflows that we’ve been seeing?

05:22 Cynthia Murphy

Yeah, gold has really taken a hard this year. It started the year so strong. It’s seen a correction and then we’ve seen massive outflows from some of the biggest gold ETFs. It’s been a little bit of a profit taking movement there. Gold hit, you know, historic highs and we’re seeing folks take some profit. There’s been concern with the rate environment. If we have a higher for long rates, then the opportunity cost for holding gold which doesn’t yield anything, just doesn’t look as compelling as some of the other income plays. So gold has to fight that battle. That said, there’s enough concern in the market, you know, geopolitical risk, concerns about the macro economy, things that keep some of that demand for gold in there. A fund like GLDM, which is kind of the mini GLD as we say, you know, that lower stock price, uh continues to gather assets slowly. So, so it’s it’s kind of moderating there in the outflows.

06:17 Speaker A

Gotcha. Something to continue to watch. Cynthia, thank you so much. Good to see you.