New regulatory measures from the South Korean government on single-stock leveraged ETFs, combined with market-driven deleveraging pressures, are reshaping the short-term volatility landscape for the KOSPI. UBS, while maintaining its 9200-point price target for the index, is cautioning that near-term volatility risks are rising and has adjusted its portfolio allocation accordingly.
The Financial Services Commission (FSC) announced a series of tightening measures, including raising the minimum cash deposit requirement to 30 million won, suspending new product launches, banning marketing promotions, and requiring investors to undergo longer education sessions. Concurrently, the assets under management (AUM) of single-stock leveraged ETFs have declined from a peak of 2.4 trillion won on June 25 to approximately 1.7 trillion won currently due to market price pressures, indicating that a spontaneous market deleveraging process was already underway before the regulations took effect.
Key Points of the Regulatory Crackdown
The new rules introduced by the FSC tighten the management of single-stock leveraged ETFs from multiple angles. The most notable measures include: significantly raising the minimum deposit requirement from the effectively enforced 3 million won to 30 million won (effective August 5), stipulating that deposits must be made in cash and cannot be substituted with securities (effective August 19), and prohibiting withdrawals of deposits while positions are held. Additionally, the minimum trading unit is set to increase from 1 unit to 20 units (tentatively in November), mandatory education hours will be extended from 2 to 3 hours, and recent market conditions and loss case studies must be included.
UBS views the suspension of new product launches and the 30 million won cash-only deposit requirement as the two most substantial measures. The deposit threshold, equivalent to 7% of household assets and 27% of financial assets for families in the third income quintile, is expected to substantially constrain retail participation. In contrast, extending education hours and raising the minimum trading unit (20 units equating to roughly $190) are seen as having a more limited practical impact.
Market Already Undergoing Spontaneous Deleveraging
It is noteworthy that before the policy announcement, falling market prices had already driven an accelerated contraction in the size of single-stock leveraged ETFs.
UBS data shows that the combined AUM of domestic and overseas-listed leveraged ETFs for Samsung Electronics Co., Ltd. and SK Hynix Inc. has fallen from a peak of approximately 2.4 trillion won on June 25 to about 1.7 trillion won currently. The total size covering all leveraged ETFs has also dropped from a peak of around 4.8 trillion won on June 22 to 3.3 trillion won, a decline of roughly 31%.
Losses have been the direct driver of this self-driven deleveraging. An investor holding since the ETFs' launch on May 27 would have incurred losses of approximately 32% and 30% for the SK Hynix Inc. and Samsung Electronics Co., Ltd. leveraged ETFs, respectively, while the underlying assets fell only 7%-9%. Measuring from the stock price peak on June 25, leveraged ETF losses widen to 44%-55%, compared to a 22%-29% drop in the underlying assets. The negative compounding effect has significantly amplified actual losses for these leveraged instruments. While net retail buying remains positive, it is showing a slow downward trend.
Leveraged ETFs' Impact on Underlying Stock Liquidity
The current structural impact of single-stock leveraged ETFs on the KOSPI far exceeds the historical precedent of the battery sector in 2023.
In July 2023, it took about 6 to 9 months for the negative price movements following the listing of battery stock leveraged ETFs to be gradually absorbed, and at that time, the battery sector's market capitalization accounted for only 16% of the KOSPI.
By June 2026, Samsung Electronics Co., Ltd. and SK Hynix Inc. together account for 56% of the KOSPI's market cap. The trading volume of single-stock leveraged ETFs in July (month-to-date) has been equivalent to 54% and 24% of the trading volume of the underlying SK Hynix Inc. and Samsung Electronics Co., Ltd. shares, respectively, constituting about 25% of the KOSPI's total turnover. Given the multiplier effect of 2x leverage, UBS believes ETF-related fund flows could have a more pronounced impact on underlying stock prices, and the resulting volatility is likely to persist for an extended period.
Long-Term Target Unchanged, Short-Term Barbell Strategy Adopted
UBS reaffirms its 12-month KOSPI target of 9200 points (implying a next-twelve-month P/E of 9x), with downside/upside scenario price ranges of 5500/10500 points. The core logic supporting this view is that KOSPI EPS is forecast to grow 265% in 2026 and 66% in 2027, with valuations at historically low levels, making the overall market still attractive.
However, in the short term, UBS believes uncertainty around AI demand prospects and fluctuating earnings outlooks for Samsung Electronics Co., Ltd. and SK Hynix Inc. will continue to push market volatility higher. This rise in volatility, in turn, is expected to accelerate the further contraction of leveraged ETF sizes.
To navigate this near-term uncertainty, UBS has shifted its portfolio strategy to a barbell allocation: adding Shinsegae (target price 1 million won), Celltrion (target price 280,000 won), and Samsung E&A (target price 71,000 won) to its preferred picks; while removing HDEC, KAI, KSOE, and Coupang from the list. Among its continued top conviction picks, SK Hynix Inc. (target price 3.2 million won) and Samsung Electronics Co., Ltd. (target price 550,000 won) remain at the forefront, offering potential upside of 74% and 116%, respectively.
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