Korean stocks have been wildly volatile in recent months--and leveraged ETFs deserve some of the blame.
The Korea Composite Stock Price Index, or the KOSPI, has more than doubled in the past year, in large part due the the market's heavy exposure to the AI trade.
SK Hynix and Samsung have emerged as major beneficiaries of the AI-driven memory chip shortage, leading to meteoric rises. At their peak, they made up over 61% of the entire index's market capitalization.
That rally supported growing demand for leveraged ETFs tracking the pair. Korean regulators approved single-stock leveraged ETFs for SK Hynix and Samsung after seeing the success of similar products on Hong Kong and U.S. exchanges.
Leveraged ETFs listed on the Korean exchange tracking SK Hynix and Samsung began trading on May 27. The new ETFs made leverage more accessible to retail traders, who play a significant role given that individual investors account for nearly half of all market trading volume on the Korean exchange.
The SK Hynix leveraged ETFs' assets under management peaked at $23 billion while the Samsung tied products' AUM hit a high of $8 billion in June. According to Morgan Stanley, single-stock leveraged ETFs accounted for roughly 20% of the KOSPI's average daily trading value from their launch through June 22.
Along with a rise in trading activity, the ETFs brought an onslaught of volatility. Jurrien Timmer, the director of global macro at Fidelity Investments, describes the speculative capital pouring into leveraged ETFs from individual investors as "fast money."
"When fast money is chasing something, it doesn't necessarily mean it's a bubble, but it certainly is going to add to volatility," he says, adding: "Leverage works great until it doesn't."
When investors turned skeptical on the global AI trade, this dynamic played out in full force. SK Hynix and Samsung plummeted more than 40% and 32%, respectively, roughly one month after hitting record highs. The KOSPI index also fell into a bear market.
The new ETFs didn't fuel the downturn, but they certainly didn't help.
"What was triggered by routine fundamental concerns and rotational flow, was amplified by leveraged ETFs, and in recent days increasingly has the hallmarks of hedge fund positioning unwind," JPMorgan analysts explain.
Regulators stepped in to tighten the regulatory framework for single stock leveraged ETFs less than two months after the products were introduced to the market. South Korea's Financial Services Commission placed a temporary halt on any new single stock leveraged ETF listings. They also announced plans to triple the deposit minimum required for retail investors to trade single stock leveraged ETFs to 30 million won, roughly $20,500.
Between the regulatory efforts to stabilize the market and the nature of traders using single stock leveraged ETFs, demand is likely to further moderate.
"For temperatures to come back down, those [fast money] traders need to sort of check out to say, 'Okay, I made money, I lost money, and that kind of levels the playing field," Timmer says.
Some leveraged ETFs tied to Korean equities fell as much as 32% in a single trading day. Timmer says this type of violent selloff is enough to scare off some fast money investors. Their exit tends to ultimately lead to lower volatility.
The AUM of the leveraged ETFs shrunk. The SK Hynix ETFs' AUM sat $11 billion as of Friday, compared to their $23 billion peak, while Samsung-tied ETFs' AUM were $4 billion, half of its respective high.
JPMorgan's equity strategists are still bullish on South Korean equities, largely due to their fundamental AI trade exposure, saying that the market should be able to withstand the position unwinds following the leveraged ETF-fueled volatility and continue to climb higher. "The question in Korea now is less about growth and more about sustainability, " write a team led by Mixo Das.
If speculative investors move on from SK Hynix and Samsung leveraged ETFs, that likely offers some stability in the long term, but the path there may prove rocky as outflows add to volatility today and put further downward pressure on an already troubled market.
Write to naomi.buchanan@barrons.com.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 27, 2026 17:32 ET (21:32 GMT)
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