Preying on Leveraged ETFs

Abstract

We argue that speculators preying on the closing rebalances of leveraged exchange-traded funds (LETFs) contributed to the Korean market's extreme volatility in 2026. An LETF's mandated daily rebalance is sized by the day's return, which generates an upward-sloping demand at market close. In response, rational speculators pre-position, enlarge the fund's order, and liquidate into the demand they have induced. Consistent with this mechanism, Korean stocks tracked by LETFs reverse about 75% of their first-day response to pre-open U.S. news by the next close and oscillate for several days thereafter, a pattern absent in every control group. Our quantification implies that self-reinforcing rebalance raised SK Hynix's annualized volatility from 100.0% to 136.7% over nine weeks and cost its products'predominantly retail holders 17.6% of their initial investment. Dispersing the rebalance across the trading day may backfire, whereas a flexible leverage multiple could help.