On the 7th, leveraged single-stock exchange-traded funds (ETFs) tracking Samsung Electronics and SK hynix suffered another significant blow, with 13 out of 14 products falling below their 20,000 won issue price. Some products saw intraday declines widen to approximately 20%. On the 8th, the Korea Composite Stock Price Index (KOSPI) closed down 5.35% at 7,246.79 points, a drop of 409.52 points from the previous session and more than 20% below its June high.
Rising Concerns and Regulatory Debate
Currently, controversy surrounding single-stock leveraged ETFs is intensifying within South Korea, involving financial regulators and members of the National Assembly. These products were only officially launched in the Korean market just over a month ago.
Huang Fei, a professor at Seoul School of Integrated Sciences and Technologies, noted that aside from core factors like the AI memory supercycle and improving fundamentals, the substantial proportion of assets under management (AUM) and trading volume attributed to Korean leveraged/inverse ETFs is one reason for the extreme volatility in the Korean stock market. "Even if there is no change in market fundamentals, the sheer capital structure can amplify each external shock multiple times over," she explained.
From the beginning of the year through the first week of July, the Korean stock market has frequently triggered various risk control mechanisms. For instance, the "Sidecar" mechanism, activated when futures prices move more than 5% from the previous day's reference price for one minute, has been triggered 31 times. The circuit breaker mechanism for the spot index has also been activated five times.
The Market's "Amplifier"
On the 6th, Ahn Cheol-soo, a lawmaker from the People Power Party and former presidential candidate, called on social media for corrective measures, including delisting, to restore normal operation to the Korean stock market. He described leveraged ETFs for Samsung Electronics and SK hynix as a "complete policy failure."
Ahn Cheol-soo also stated that the KOSPI index "has degenerated into a casino." He called on President Lee Jae-myung to hold the relevant heads of financial regulatory agencies accountable.
According to data from financial data firm The Kobeissi Letter, the AUM of Korean leveraged ETFs reached a historical high of approximately $45 billion in the second quarter of this year, an increase of about 800% since the beginning of 2026. Nomura Securities also noted in a previous market strategy report that the daily mechanical rebalancing trades of Korea's highly concentrated single-stock leveraged ETFs can multiply the impact of external shocks even in the absence of fundamental changes.
Ahn Cheol-soo provided data showing that funds flowing into leveraged ETFs for Samsung Electronics and SK hynix have reached 212 trillion won (approximately $1.386 trillion). The two companies together account for about 60% of the KOSPI's total market capitalization. "Adding leveraged funds on top of such high-weight stocks is equivalent to installing an 'amplifier' for the entire index, continuously magnifying market fluctuations," he wrote. The KOSPI's volatility index (V-KOSPI) had previously surged to a record 90.8 due to market turbulence.
He further argued that rather than continuing to allow single-stock leveraged ETFs, it would be better to directly ban such products while relaxing related regulatory requirements to improve the structure of the Korean capital market.
Shifting Regulatory Stance and Reflection
At the end of January this year, South Korea's Financial Services Commission (FSC) announced it would allow the issuance of single-stock leveraged ETFs based on domestic blue-chip stocks like Samsung Electronics and SK hynix. On April 28th, it formally revised related rules, raising the maximum investment holding limit for a single stock to 100% and removing the requirement that a fund's portfolio must contain at least 10 stocks. On May 27th, the first batch of 2x leveraged ETFs linked to Samsung Electronics and SK hynix officially listed, aiming to keep high-risk trading demand that was previously flowing overseas within the domestic market.
At the time, funds under Korean domestic securities firms like Mirae Asset actively participated in the issuance. With continuous inflows from retail investors, the products quickly attracted massive funds after listing, recording extremely high trading volumes within just weeks, with activity far exceeding that of regular ETFs. Boosted by the AI-related chip rally, the 14 leveraged ETFs alone saw a combined trading volume of 212 trillion won in June, accounting for 26.6% of total ETF trading volume during the same period. The turnover rate for some products even exceeded 120%.
Nomura strategists estimate that for every 1% market movement, leveraged ETFs currently generate about $9 billion in rebalancing demand. These trades are mostly "mechanical" rebalancing that fund managers must execute to maintain the promised leverage, potentially increasing buying pressure in the later stages of a rally and adding selling pressure during market declines.
As market volatility continued to widen, Korean regulators recently began signaling a more cautious stance. On July 5th, the Bank of Korea, in a written response to a lawmaker from the People Power Party, stated that as Samsung Electronics and SK hynix account for more than half of the total market capitalization and trading volume of the Korean stock market, the continued expansion of single-stock leveraged ETFs could further increase market concentration and exacerbate market volatility.
The Bank of Korea stated that when a company's operating conditions or market expectations change, such products can reinforce one-way capital flows. Once the market corrects, losses for retail investors could be further amplified, while ETF redemptions and portfolio rebalancing could also intensify price fluctuations in the related stocks. The Bank of Korea emphasized it would continuously monitor the impact of single-stock leveraged ETFs on the Korean stock market and financial system. This contrasted with its stance in the "Financial Stability Report" released on June 24th, where it had characterized such products as "helpful in attracting foreign capital and curbing capital outflows."
Prior to the central bank's changed stance, South Korea's Financial Supervisory Service (FSS) had already issued warnings about these high-risk products. FSS Governor Lee Chan-jin publicly expressed regret at a press conference on June 22nd for approving the aforementioned ETF products. "We pushed forward too hastily at the time," he said. "Looking back, I regret approving these products. Perhaps I should have done everything in my power to prevent their approval."
Currently, the FSS is studying specific measures to tighten investment thresholds for single-stock leveraged ETFs. Potential intervention measures reportedly include limiting the number of issuances, setting size caps, and raising investment thresholds for retail investors.
Professor Huang Fei analyzed that for the current Korean stock market, any signal of regulatory tightening or even market rumors could trigger a panic withdrawal of leveraged funds. "The innovative product originally hoped to attract foreign capital has now become an uncertain factor hanging over Korean regulators and the capital market, with undercurrents swirling regardless of the direction taken."
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