Leveraged ETFs Tied to SK Hynix Hammered Amid Deepening Chip Sector Wreck

The escalating volatility surrounding the artificial intelligence (AI) trade has severely impacted bullish equity bets made through leveraged exchange-traded funds (ETFs) this week. Leveraged ETFs tied to the semiconductor giant SK Hynix have experienced substantial declines amidst a deepening sell-off across the chip sector. While memory chipmakers were market darlings earlier this year, driven by surging demand for AI infrastructure, recent turbulences have underscored the risks associated with these products.

The GraniteShares 2x Long SK Hynix Daily ETF (SKUU), which tracks SK Hynix's American Depositary Receipts (ADRs), plunged 18.1% on Tuesday, extending its weekly loss to 30.2%. Similarly, the ProShares Ultra SK Hynix ETF (SKHU) slid 18.6% on Tuesday, resulting in a weekly slump of nearly 29%. In South Korea, the SAMSUNG KODEX SK Hynix Single Stock Leverage fund has fallen over 60% from its June peak and approximately 45% since its debut. These sharp declines highlight the extreme volatility risk and the “negative compounding” effect inherent in leveraged products.

These developments are part of a broader sell-off observed in semiconductor stocks. South Korea's Kospi index plunged as much as 11% on Tuesday, with shares of Samsung Electronics and SK Hynix dropping between 10% and 13%. The MSCI World Semiconductor Index also saw a roughly 13% decline in July, marking its worst monthly performance since 2022. These downturns indicate growing concerns in global markets regarding the sustainability of AI investments and lofty valuations.

While leveraged ETFs offer investors magnified daily returns of stocks or indexes, they also carry the risk of amplifying losses proportionally when market volatility increases. South Korea's Financial Supervisory Service (FSS) had previously warned about the dangers of such leveraged single-stock ETFs, even expressing regret over their approval. Experts caution that the daily rebalancing mechanism of these products can exacerbate volatility by forcing more selling during market downturns, potentially leading to greater-than-expected losses for investors over time.

The current downturn in the chip sector is also linked to broader economic and political contexts, including questions about the sustainability of the AI investment cycle and the intensifying competitive threat from China's semiconductor industry. Reports of a state-backed Chinese company beginning mass production of advanced DUV lithography machines and narrowing the high-bandwidth memory (HBM) gap threaten AI deals between leaders like SK Hynix and Samsung and US hyperscalers. These developments further complicate global supply chain dynamics and geopolitical competition.

Analysts and market experts express uncertainty about how AI spending will ultimately pay off in the long term. While some experts argue that the long-term opportunity for memory makers remains intact, forecasting a price peak in 2027, others point out that leveraged products magnify market swings. Investors are now focused on SK Hynix's quarterly earnings, due later this week. These results could provide crucial insights into whether AI-linked demand still justifies the current volatility.