In the first half of 2026, the Korea Composite Stock Price Index surged significantly, driven by an AI-fueled rally in memory chip stocks. It hit a record intraday high of 9,385 points on June 19 before sharply reversing, falling to 6,807 points by July 13, a decline of approximately 27%. The market triggered circuit breakers seven times during the year, with volatility surpassing historical highs seen during the 1997 Asian financial crisis.
The factors behind this severe volatility are multiple, including concerns over the sustainability of AI capital expenditure, persistent foreign capital outflows, and a central bank rate hike. However, the introduction of single-stock leveraged ETFs is widely considered a key institutional factor that amplified the magnitude of the fluctuations. By examining six aspects of the crisis—the timeline, the scale and losses of leveraged ETFs, the leverage amplification mechanism, the characteristics of retail investor participation, spillover effects, and the regulatory response—our key findings include the following.
First, after 16 leveraged ETFs were launched, their total assets under management grew from approximately 4.9 trillion Korean won to a peak of around 16 trillion Korean won within one month. In June alone, trading volume reached 212 trillion Korean won. Following the crash, their size shrank to about 10.34 trillion Korean won as of July 14. Over 1.2 million leveraged accounts hit margin calls, with approximately 320,000 to 460,000 accounts being liquidated. Data from the Korea Financial Investment Association shows that the balance of margin loans peaked at 38.6 trillion Korean won on June 24 before gradually declining.
Second, Korean retail investors are the dominant players in leveraged ETFs, holding approximately 60% of the assets under management.
Third, the volatility in the Korean market had statistically significant spillover effects on the MSCI Emerging Markets Index, the Nikkei 225, and the ChiNext board of China's A-share market. For the ChiNext board, the full-sample beta is approximately 0.30, rising to a conditional beta of 0.44 on days when the KOSPI declined.
Fourth, on July 16, South Korean regulators announced seven measures, while the central bank raised the benchmark interest rate by 25 basis points. The regulatory measures from the Financial Services Commission and the central bank's rate hike were aligned in their direction, both aimed at reducing market leverage, but they operated through different channels. The FSC sought to limit incremental leverage by raising entry barriers, while the central bank aimed to curb leverage demand by increasing financing costs. The concurrent implementation of both policies on the same day concentrated the force of deleveraging, which, for a market already in the process of forced liquidations, intensified short-term adjustment pressure.
Where to begin the timeline of the Korean stock market leveraged ETF crisis?
In January 2026, the Financial Services Commission approved the issuance of single-stock leveraged ETFs based on Samsung Electronics and SK Hynix. Rules were revised in April, and 16 products were listed on May 27. Within a month, their size grew from 4.9 trillion Korean won to approximately 16 trillion Korean won. The KOSPI hit an intraday high of 9,385 points on June 19, closing at 9,114 points on June 22. On June 23, it fell 9.99% in a single day, and over the subsequent three weeks, it retreated by approximately 27%, triggering circuit breakers seven times within the year. Over 1.2 million leveraged accounts hit margin calls, and approximately 320,000 to 460,000 accounts were liquidated. On July 15, President Lee Jae-myung ordered the formulation of countermeasures, and on July 16, the FSC introduced seven regulatory measures, with the central bank simultaneously raising the benchmark rate by 25 basis points to 2.75%. From approval to emergency tightening, the entire process took less than half a year.
What were the scale and losses of Korean leveraged ETFs?
On their first day of listing, the 16 products had an AUM of approximately 4.9 trillion Korean won. This peaked at around 16 trillion Korean won at the end of June. Following the crash, the AUM shrank to approximately 10.34 trillion Korean won as of July 14. Trading volume in June reached 212 trillion Korean won, accounting for about 27% of total ETF trading. Over 1.2 million accounts hit margin calls, with roughly 320,000 to 460,000 accounts liquidated. Data from KOFIA shows that investor deposits fell from a peak of 139.7 trillion Korean won to 109.9 trillion Korean won, while margin loan balances declined from a peak of 38.6 trillion Korean won on June 24 to 34.4 trillion Korean won. Liquidation pressure was concentrated on July 9, while on the circuit breaker day of July 13, it accounted for only 1.8%.
Why did leveraged ETFs become an amplifier?
Leveraged ETFs track daily 2x returns. To maintain a constant leverage ratio, fund managers must mechanically rebalance their portfolios near the market close—buying on up days and selling on down days. This rebalancing itself creates additional buying and selling pressure on the underlying stocks. Samsung Electronics and SK Hynix together account for over 50% of the KOSPI's market capitalization. This high concentration means that the ETF rebalancing has an amplified impact on the broader index. When the market falls, ETF sales push stock prices lower, triggering margin calls and forced liquidations, creating a negative feedback loop. The size of offshore products is also considerable. For example, the Hong Kong-listed CSOP SK Hynix 2x leveraged fund at one point surpassed $15 billion in assets. In terms of volatility, the KOSPI's 30-day historical volatility broke above 80, exceeding the historical high seen during the 1997 Asian financial crisis. Furthermore, leveraged ETFs exhibit a volatility decay effect: the greater the volatility, the more the net asset value deviates from the underlying index's return.
Why did Korean retail investors become the main buyers of leveraged ETFs?
Korean retail investors are the main force behind leveraged ETFs, holding approximately 60% of the AUM. In the short term, high-leverage products hold direct appeal for retail investors during a rising market. Over the medium to long term, Korean household asset allocation is shifting from real estate to equity assets: the number of retail investors has grown from approximately 6.2 million in 2019 to about 14.5 million. Policy drivers include real estate regulation, corporate governance reforms, dividend tax adjustments, and upgrades to Individual Savings Accounts. In terms of capital flows, as of July 16, 2026, foreign investors had cumulatively net sold approximately 188.9 trillion Korean won in Korean stocks, while retail investors were the net buyers during the same period.
What are the spillover effects of the Korean stock market crisis?
The volatility in the Korean market transmits outward through three layers. The first layer involves a systemic impact on emerging markets. The 60-day rolling correlation between the KOSPI and the MSCI Emerging Markets Index is 0.91, with a beta of approximately 0.35, making Korea one of the core pricing variables for emerging market risk. The second layer involves regional contagion, impacting the Nikkei 225 and China's A-share ChiNext board. The full-sample beta for the ChiNext board is about 0.30, which rises to 0.44 on days when the KOSPI declines. The more technology-oriented the A-share sector, the stronger the contagion. On July 16, after the KOSPI fell 6.4%, the ChiNext board dropped 7.1% the following day, and the Nikkei fell 4.0%. The third layer shows a limited beta impact on US stocks (Nasdaq beta is about 0.13). The transmission occurs more through the cross-market trading chain of SK Hynix's ADR.
How have South Korean regulators responded to the crisis?
On July 16, South Korea's Ministry of Economy and Finance, the FSC, the Financial Supervisory Service, and the central bank held an emergency meeting and announced several measures. These include raising the margin requirement from 10 million Korean won to 30 million Korean won, accepting only cash (effective August), suspending new listings, banning advertisements, raising the minimum trading unit to 20 shares (effective November), tightening the premium/discount management rule from 3% to 2%, extending investor education from 2 to 3 hours, and restricting new listings for non-compliant operators. The FSC expects these new rules to compress the market size to about one-third of its current level. However, they will not force the liquidation of existing products, indicating a regulatory approach of gradual tightening. On the same day, the central bank raised the benchmark interest rate by 25 basis points to 2.75%, the first increase since January 2023. The FSC's measures aim to reduce leverage from the access point (raising margins, suspending new listings), while the central bank's rate hike does so from the cost side (raising financing rates). While both are aligned in direction, their concurrent implementation on the same day concentrates the force of deleveraging.
Comments