South Korean individual investors are pivoting to overseas markets, a move that carries significant risks for themselves and could amplify volatility in foreign markets.
During the Asia-Pacific trading session on August 6, Japanese and South Korean stock markets experienced notable declines. The Nikkei 225 fell nearly 2% in the morning, while South Korea's KOSPI Index dropped over 5%, with SK Hynix plunging more than 9% and Samsung Electronics sliding over 6%. The Korea Exchange activated its SIDECAR mechanism, halting programmatic sell orders on the KOSPI. Meanwhile, the South Korean won strengthened against the US dollar to 1415.30, reaching its highest level since mid-October 2025. A stronger local currency typically weighs on domestic stock markets, but the key driver behind this selloff appears to be recent regulatory tightening by South Korean authorities on single-stock leverage, prompting many individual investors to look abroad.
Retail Investors Shift Overseas
After the South Korean government tightened regulations on single-stock leveraged exchange-traded funds (ETFs), investors' capital is rapidly flowing into US leveraged ETFs. According to data from the Korea Exchange's information system on August 5, following the implementation of higher margin requirements and investment limits by financial regulators, trading volumes for these products have collapsed. The combined trading value of 16 single-stock leveraged or inverse ETFs listed in South Korea plummeted by 89.8%, from 13.0361 trillion won on July 15 prior to the regulation to 1.3329 trillion won on August 4. The KOSPI Index had surged 76% in 2025 and briefly rose over 100% in the first half of 2026. However, after hitting an all-time high of 9,385.59 points on June 19, it reversed course, falling to 5,262.77 points by July 29—a drawdown of more than 43%. Single-stock leverage has been blamed for amplifying market volatility during this downturn. Consequently, the recent regulatory crackdown raised the barrier for retail investors, increasing the base margin requirement from 10 million won (including securities) to 30 million won in cash.
Despite this, South Korean retail investors remain enthusiastic about leveraged ETFs and are shifting their focus to overseas products, such as those listed in the US. Between July 15 and August 4, the highest net purchase value of overseas stocks by South Korean investors was the US fund SOXL (Direxion Daily Semiconductor Bull 3X), with net buying reaching $2.48789 billion. The Tesla 2x leveraged ETF (TSLL) ranked sixth with net purchases of $214.36 million, while the Korea 3x Leveraged ETF (KORU) attracted $130.95 million in inflows, placing eleventh. Data from SEIBro, a portal operated by the Korea Securities Depository, also shows that after the KOSPI Index turned lower in June, South Korean retail investors net purchased $633 million worth of US ETFs that month. As the selloff intensified in July, investors net bought $4.67 billion in US stocks, marking the largest single-month net purchase since January’s $5 billion figure.
Professor Son Jae-sung from the Department of Accounting at Soongsil University noted that the regulatory move, while intended to protect investors, appears to be reactive, coming after losses have already occurred. "South Korean single-stock leveraged ETFs are excessively volatile, while the US market is relatively more stable. It's a natural phenomenon for investors to shift to overseas leveraged ETFs. Under the current structure, where regulators only restrict domestic products but leave overseas ones unchanged, the trend of overseas investment concentration is likely to persist," he said.
Growing Risks
Son also warned that investing in US-listed leveraged ETFs requires investors to bear currency exchange rate risks, and some products, with 2x or 3x leverage structures, carry even higher volatility than South Korean leveraged ETFs. This could expose investors to greater risks. This warning is not unfounded. In July, global technology stocks faced a brutal selloff. Semiconductor and memory chip stocks, which had previously hit record highs, collectively plunged as investors grew concerned about excessive capital expenditure in the AI sector and retreated from the previously leading AI concept stocks. The Philadelphia Semiconductor Index fell approximately 21% in July, marking its largest single-month decline since 2008.
In a client note on August 5, JPMorgan strategist Nikolaos Panigirtzoglou, citing data from Pivotal Path, reported that long-short hedge funds focused on technology, media, and telecom stocks lost over 10% in July. This loss does not yet account for the widely watched Situational Awareness fund, which was forced to sell most of its public stock portfolio last week. He suggested that this could be profoundly altering the market structure for tech stock trading—hedge funds' participation capacity may structurally decline, while individual investors' influence is likely to expand, potentially increasing volatility in the tech sector. According to another JPMorgan report, global hedge funds gave back nearly 3% of their year-to-date gains in July due to the unwinding of tech-related trades. In the Asia-Pacific region, stock-picking funds averaged a steep loss of 9.4%. Momentum trading, which relies on the logic that past winners will continue to outperform, was a primary source of losses and experienced a systemic breakdown in July.
"The severe losses in July may force hedge funds to adopt stricter risk management frameworks and concentration limits, thereby restricting their ability to hold highly volatile tech stocks," Panigirtzoglou noted. "If this assessment is correct and hedge funds' tech exposure undergoes a structural contraction, then tech stock trading will, over the long term, become more reliant on individual investors. This would make it more vulnerable to volatility shocks from leveraged ETFs, retail options buying, and margin accounts used by retail investors."
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