New regulations from South Korean authorities on single-stock leveraged ETFs, combined with inherent market deleveraging pressures, are reshaping the short-term volatility landscape for the KOSPI. While maintaining its KOSPI target price of 9200 points, UBS warns of rising near-term volatility risks and has adjusted its portfolio strategy 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 complete longer educational sessions.
Concurrently, the assets under management (AUM) for single-stock leveraged ETFs have already declined from a peak of approximately 2.4 trillion won on June 25 to around 1.7 trillion won currently due to market price pressures, indicating that a spontaneous market deleveraging process was underway even before the regulatory changes took effect.
Although fundamental earnings provide support—UBS forecasts KOSPI EPS growth of 265% and 66% for 2026 and 2027, respectively—uncertainties surrounding the earnings outlook for Samsung Electronics Co Ltd and SK Hynix Inc, coupled with concerns over AI demand, are expected to continue weighing on market sentiment in the short term.
UBS has shifted its portfolio strategy towards a barbell approach, adding Shinsegae Co Ltd, Celltrion Inc, and Samsung Engineering Co Ltd, while removing four holdings including Coupang Inc.
New Regulatory Measures: Varying Impact, Focus on Raising Barriers
The new FSC rules tighten the management of single-stock leveraged ETFs across multiple dimensions. The most notable measures include: a significant increase in the minimum deposit requirement from the effectively applied 3 million won to 30 million won (effective August 5), a mandate that deposits must be in cash and cannot be substituted with securities (effective August 19), and a prohibition on withdrawing deposits while holding positions.
Additionally, the minimum trading unit is proposed to increase from 1 unit to 20 units (November, tentative), mandatory education duration is extended from 2 to 3 hours, and the curriculum must include recent market trends and case studies of losses.
UBS views the suspension of new product launches and the 30 million won full-cash deposit requirement as the two most impactful measures. Regarding the deposit threshold, 30 million won represents approximately 7% of the assets of households in the third income quintile and 27% of their financial assets, posing a substantial constraint on retail participation.
In contrast, the practical effects of extending education hours and raising the minimum trading unit (20 units equating to about $190) are considered relatively limited.
Market Already Spontaneously Deleveraging, Pressure Eased Before Regulation
It is noteworthy that even before the policy announcement, declining market prices had already driven an accelerated contraction in single-stock leveraged ETF sizes. UBS data shows that the combined AUM of domestic and overseas-listed SEC and SKH single-stock leveraged ETFs has fallen from a peak of about 2.4 trillion won on June 25 to approximately 1.7 trillion won currently.
The total size encompassing all leveraged ETFs has also decreased from a peak of around 4.8 trillion won on June 22 to 3.3 trillion won, a drop of about 31%.
The effect of losses is the direct driver of this spontaneous deleveraging. If an investor held positions from the ETF launch on May 27 until now, SKH and SEC leveraged ETFs would have recorded losses of about 32% and 30% respectively, while the underlying assets themselves fell only 7%-9%.
Calculating from the stock price peak on June 25, losses for leveraged ETFs expanded to 44%-55%, compared to a 22%-29% decline in the underlying assets. The negative compounding effect has significantly amplified the actual losses of these leveraged instruments.
While net buying by retail investors remains positive, it shows a slow downward trend.
Impact of Leveraged ETFs on Underlying Stock Liquidity Cannot Be Ignored
The structural impact of current single-stock leveraged ETFs on the KOSPI far exceeds the historical precedent of the battery sector in 2023. Following the launch of battery stock leveraged ETFs in July 2023, it took about 6 to 9 months for the negative price movement to be gradually digested, and at that time, the battery sector's market capitalization accounted for only 16% of the KOSPI.
By June 2026, the combined market capitalization of SEC and SKH had reached 56% of the KOSPI. The trading volume of single-stock leveraged ETFs in July (month-to-date) was equivalent to 54% and 24% of the trading volume of SKH and SEC underlying shares, respectively, accounting for about 25% of the KOSPI's total trading volume.
Considering the multiplier effect of 2x leverage, UBS believes that ETF-related fund flows could have a more pronounced impact on underlying share prices, and the resulting volatility is likely to persist for an extended period.
Long-Term Target Unchanged, Adopting Barbell Strategy for Short-Term Volatility
UBS reaffirms its 12-month KOSPI target price of 9200 points (corresponding to an NTM P/E of 9x), with downside/upside scenario price ranges of 5500/10500 points. The core logic supporting this view is the forecasted KOSPI EPS growth of 265% and 66% for 2026 and 2027, respectively, coupled with historically low valuations, making the overall market still attractive.
However, in the short term, UBS believes that uncertainties in AI demand prospects and volatility in the earnings outlook for Samsung Electronics Co Ltd and SK Hynix Inc will continue to push market volatility higher. This increase in volatility, in turn, is expected to accelerate further contraction in leveraged ETF sizes.
To navigate this short-term uncertainty, UBS has adjusted its portfolio strategy to a barbell configuration: adding Shinsegae Co Ltd (target price 1 million won), Celltrion Inc (target price 280,000 won), and Samsung Engineering Co Ltd (target price 71,000 won) to its preferred list; while removing HD Hyundai Electric Co Ltd, Korea Aerospace Industries Ltd, HD Korea Shipbuilding & Offshore Engineering Co Ltd, and Coupang Inc from the list.
Among the stocks it remains bullish on, SK Hynix Inc (target price 3.2 million won) and Samsung Electronics Co Ltd (target price 550,000 won) still top the list, with potential upside of 74% and 116%, respectively.
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