Key insights
- Sandisk shares experienced a significant drop due to concerns originating from South Korea's memory chip market. The approval of highly leveraged ETFs tracking Samsung and SK Hynix, coupled with regulatory warnings about their risk, has ignited a sell-off. This suggests potential overvaluation and increased volatility in the AI memory chip sector, which could spill over to related US equities.
Did the AI memory chip bubble just burst? Shares of memory specialist Sandisk (SNDK 13.30%) imploded Tuesday morning, falling 11% through 10:35 a.m. ET. And you can trace the origins of this sell-off straight to one place:
South Korea.
Home to computer memory giants Samsung and SK Hynix, South Korea is the epicenter of money-making in the memory market. Problem is, gigantic profits earned on memory stocks this year have created a Korean stock market bubble, and it may have just popped.
Korea's Financial Supervisory Service (FSS) approved the creation of 16 "single-stock leveraged ETFs" in late May, all of which track Samsung and SK Hynix with 2x leveraged bets on the stocks' performance. When Samsung stock, for example, gains 1%, the ETF that tracks it should gain 2% -- but when Samsung loses 1%, the losses would be magnified just as much.
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Think that might make the stock market more volatile? Well, that's exactly what's happening today -- but it's happening with the best intentions.
FSS Governor Lee Chan-jin now states that he wishes he had blocked the creation of these ultra-leveraged ETFs, which have tripled in size to more than $9 billion over the past few weeks, but are "high-risk products" bought primarily by individual investors gambling on market momentum. Today's warning attempted to cool things down -- but ignited a sell-off instead.
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Similar concerns about Sandisk-leveraged ETFs may be adding to this stock's volatility today. More broadly, investors may wonder how much of the momentum that lifted Sandisk stock 4,700% in 52 weeks was investors buying Sandisk as an alternative to Samsung and SK Hynix shares?
If the price rises in Korea were produced artificially -- maybe Sandisk stock didn't deserve all its gains, either?