Kioxia Holdings Corp. faces more wild price swings with leveraged exchange-traded funds tracking the Japanese memory chipmaker’s shares set to be listed in the US.
Corgi Strategies LLC, GraniteShares Advisors LLC and Tuttle Capital Management LLC are among issuers seeking to launch the products, a type of ETF that uses the underlying stock, futures and options to turbocharge returns. The planned listings come against a backdrop of increased scrutiny on leveraged ETFs in recent months due to their role in magnifying share price moves.
That puts Kioxia in the crosshairs of a rush by investors to ramp up bets on the AI boom which has turned leveraged ETFs into a $270 billion business. It would be the first Japanese company to have its shares tied to a single-stock leveraged ETF, according to data compiled by Bloomberg.
“There are a lot of really interesting companies that US investors are going to want to get access to,” said Matthew Tuttle, chief executive officer of Tuttle Capital, which is preparing to list a Kioxia leveraged ETF as soon as next month. “Japan will be the next wave” of such products, he said in an interview.
At least nine ETFs that aim to offer two times the daily return or twice the inverse return of Kioxia shares or their American Depository Receipts are pending approval, US filings showed. The flash memory company is already the most volatile major stock in Japan, becoming the country’s most valuable firm early in June before rapidly seeing its market capitalization halve as AI jitters took hold.
The instability in such tech stocks has fed into some big fluctuations in Japan’s broader market, which is undergoing a period of rapid adjustment after years of being relegated to the sidelines by global investors.
An annualized measure based on volatility over the past 30 trading days is hovering above 37% for the Nikkei 225 Stock Average, higher than the 22% for the Hang Seng Index in Hong Kong and 13% for the S&P 500.
The price swing gauge for South Korea’s Kospi Index is running above 75%. Volatility there has resulted in the regulator halting new listings of single-stock products after a surge in popularity of funds tied to Samsung Electronics Co. and SK Hynix Inc.
“These leveraged ETFs distort normal market mechanics and increase the volatility massively, as seen by the price actions in Korea recently,” said Andrew Jackson, head of Japan equity strategy at Ortus Advisors, of the expected listing of Kioxia-tied ETFs. “They are a bad idea as they only amplify the madness that we are seeing in markets and especially AI related stocks which makes it very difficult for real-money investors.”
Read more: The Leveraged AI Bet That’s Whipsawing Markets Around the World
In Japan, it’s not just Kioxia shares that stand to be buffeted by such products. Tuttle Capital has funds tracking SoftBank Group Corp., Nintendo Co. and Metaplanet Inc. pending listing, according to a US filing. Direxion is working on potential listings of leveraged products tied to Tokyo Electron Ltd. and Toyota Motor Corp. among others, while Themes ETF Trust is targeting companies including Fujikura Ltd. and Lasertec Corp., filings showed.
Under the current listing system, leveraged ETFs that track individual stocks are not permitted to list publicly in Japan as they’re not diversified enough, according to Kei Okazaki, head of ETF secondary trading at the Tokyo Stock Exchange. Local investors are able to access such overseas-listed products through brokerages, he said.
Leveraged ETFs need daily rebalancing to provide their promised performance to investors, often using swap contracts with banks to do so. Since the trading amount is predictable based on share moves and the ETF size, traders like hedge funds and market makers often start buying or selling the assets ahead of the rebalancing, which increases volatility.
Heavy daily turnover, however, may help absorb any impact from trades related to leveraged ETFs, while the size of daily rebalancing will likely be relatively small unless the funds grow significantly in size.
Tuttle Capital is expecting to launch its T-REX 2X Long Kioxia Daily Target ETF as soon as next month, according to the firm’s CEO. He declined to give the target size. As well as US buyers, Tuttle said he’s also seeing interest from Korean investors, whose inflows account for about a third of the manager’s assets.
Many analysts remain bullish on Kioxia, with the average 12-month forward price target more than 110% above the current share price despite the recent volatility.
“We get demand from Japanese investors who want specific products. And Kioxia, clearly given the performance and given the interest, is one of those,” Will Rhind, CEO of GraniteShares Advisors, said in an interview. He expects the firm’s two Kioxia leveraged ETFs to be available on online brokerage platforms in Japan.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Yasutaka Tamura
