The South Korean stock market is experiencing extreme volatility due to a highly concentrated trading structure, where two semiconductor stocks and leveraged exchange-traded funds (ETFs) tracking them now account for over 70% of total trading volume. This concentration is pushing one of the world's best-performing markets toward sharp swings.
According to a report, market volatility intensified significantly after the launch of the aforementioned leveraged ETFs in late May. The benchmark Kospi index closed down 5.4% on Wednesday, marking a 20% decline from its June peak and officially entering a technical bear market. So far this year, the market has triggered six full-day trading halts, accounting for half of all such halts since 2000. South Korea's top financial regulator has recently expressed regret, acknowledging the products have created negative side effects.
This leveraged bet, largely driven by retail investors, was initially designed to amplify gains from the historic rally in chip stocks—both shares had more than tripled from their year-start levels at their peaks. However, as doubts grow over the heavy capital investments required for artificial intelligence (AI), the chip stocks are swinging wildly with every supply chain development, and the volatility of leveraged products is magnified further, turning the bet into a rapid source of losses.
Concentration Reaches Extreme Levels, Regulatory Pressure Mounts
Data from CLSA's South Korea unit shows that on the day before the leveraged ETFs began trading (May 26), Samsung Electronics Co Ltd and SK Hynix Inc already accounted for 31% of the total market's trading value. Including ETF trading, this proportion surged to 84% in late June and remained at 73% as of Tuesday this week, highlighting a worsening concentration trend.
This anomaly has drawn criticism toward regulators. An opposition party lawmaker has publicly called for the forced delisting of the related products. The leveraged ETFs were originally intended to channel more retail capital back into the domestic market and help curb further weakness in the Korean won, but their actual impact has contradicted these policy goals.
In fact, even before single-stock ETFs were approved, multiple investors and analysts warned that the South Korean market's heavy reliance on these two chip stocks posed significant risks if the AI boom showed cracks. Together, Samsung and SK Hynix represent a 54% weighting in the Kospi benchmark index.
Leverage Mechanism Self-Reinforces, Creating a Volatility Spiral
Ian Samson, a portfolio manager at Fidelity International, noted that the operational mechanics of leveraged ETFs inherently amplify market volatility: "To maintain a constant leverage ratio, they must buy more of the underlying stock when prices rise and sell more when prices fall. Retail investor participation and the launch of new leveraged products only layer additional volatility on top of the already substantial fundamental uncertainty driving South Korea's semiconductor sector."
This mechanistic feedback loop is making abnormal single-day swings exceeding 5% increasingly common. On Tuesday, the Kospi plunged more than 8% intraday, triggering a market-wide trading halt—the sixth such halt this year.
CLSA Korea analyst Jongmin Shim stated that the high concentration in the two chip stocks and their leveraged products "tends to exacerbate short-term price volatility and has suppressed broader market breadth and sentiment in recent weeks." However, he added: "I am inclined to view the current adjustment within the context of a bull market rather than as the start of a systemic downturn."
Currently, the Kospi has fallen 20% from its June peak, officially entering a technical bear market. Whether the market can rebuild confidence amid ongoing fundamental uncertainty for chip stocks remains to be seen.
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