A familiar Wall Street fund structure rattles Korean markets with no easy fix in sight

Korea’s single-stock leveraged exchange-traded funds (ETF) have become a key driver of volatility in one of the world's hottest stock markets amid a dramatic reversal from a blistering rally to a steep decline. Economists say the launch of the products was an inevitable bid to staunch the flow of capital overseas, but their debut was poorly timed, arriving just as an AI-driven rally had already heightened volatility in a market heavily concentrated in Korea's two largest chipmakers, magnifying their impact on the broader market to a degree rarely seen elsewhere.

Korea was already home to one of the world’s most volatile stock markets before introducing 16 single-stock leveraged ETFs tied to Samsung Electronics and SK hynix on May 27. The benchmark index had already gained 87 percent this year, before plunging by 34 percent as of Tuesday after breaking past the 9,000 mark in June.

The new products further fueled market swings by drawing speculative demand. Since they launched, 17 sidecars — market safeguards designed to temporarily halt trading during periods of extreme volatility — have been triggered, with a total of 35 activations this year, earning the market the nickname the "Roller Kospi." 

The volatility has put financial regulators on high alert, scrambling to contain risks with few easy solutions. Financial Supervisory Service Gov. Lee Chan-jin acknowledged the difficulty of the task, saying there "doesn't seem to be a clear answer because of the market's structural issues" during a meeting with about 20 asset managers on Monday. The remarks came a month after he said he regretted approving the products.

The Financial Services Commission (FSC) also met with brokerages and asset managers on Tuesday to discuss additional safeguards for single-stock leveraged ETFs. The meeting came a day before the FSC was set to brief President Lee Jae Myung on policy tasks. Measures under consideration include raising the minimum investment requirement from the current 10 million won ($6,700) and strengthening the mandatory investor education required before trading the products.

“The launch of these products was inevitable to keep capital from flowing overseas, but the timing was unfortunate,” said Lee Bo-mi, a senior research fellow at the Korea Institute of Finance. “Investors were already piling into Samsung Electronics and SK hynix on the back of the AI chip rally. Launching products that allowed them to double down on those bets only reinforced that concentration and fueled volatility.”

Speculation becomes a habit

Single-stock leveraged ETFs are not unique to Korea. Europe introduced them in 2018, followed by the United States in 2022 and Hong Kong in 2025. But the products have proved far more controversial in Korea, where the stock market is heavily concentrated on two chip giants. Samsung Electronics and SK hynix together accounted for 52 percent of the Kospi’s market capitalization as of Tuesday.

That concentration stands in contrast to other markets. In the United States, for instance, Nvidia — the largest company in the country— accounts for around 10 percent of the Nasdaq's market capitalization. The more diversified market limits the impact that trading in single-stock leveraged ETFs can have on overall market movements. The Hang Seng Index imposes an 8 percent cap on individual stock weightings to prevent dominance by any single security.

A much wider range of underlying stocks is also offered abroad.

In the United States, single-stock leveraged ETFs track not only megacaps such as Nvidia and Tesla but also smaller companies like EV maker Rivian, whose market cap stands at around $25 billion. Hong Kong follows a similar approach, offering leveraged products tied to a wide range of overseas stocks, including Berkshire Hathaway, Tesla and Coinbase Global.

Market structure aside, the introduction of the products also generated new speculative demand instead of simply shifting existing demand back from overseas.

Before Korea introduced its own products, retail investors had flocked to a Hong Kong-listed leveraged ETF tied to SK hynix. The CSOP SK hynix Daily (2x) Leveraged Product was their largest holding in the region, with $258.7 million invested before similar ETFs became available at home.

Demand naturally surged once Korea launched its own products. Assets under management of the four largest single-stock leveraged ETFs operated by Samsung Asset Management and Mirae Asset Global Investments stood at nearly 9 trillion won ($6 billion) on Tuesday — an achievement made in less than two months after the debut, according to ETF Check. By the end of June, nearly 700,000 people — about 5 percent of Korea’s retail investors — had completed the mandatory training required to trade the products, according to the Korea Financial Investment Association.

The double-digit swings offered by the leveraged products have proved irresistible to many retail investors, who have embraced the trades as part of their daily routine despite the risk of losses outpacing the original investment.

“This time, I lost. I admit it,” wrote a retail investor on the NH Investment & Securities app after losing more than 45 percent on a 40.5 million won position, adding that he plans to buy again. “To make a fresh start, you have to know when to cut your losses.”

Others on the board said they’re placing smaller yet repeated bets, hoping to make enough to cover lunch or a cup of coffee.

“The goal was to redirect demand for leveraged products from overseas to Korea, supporting the won and the domestic capital market,” said Yoon Sun-joong, a professor of Finance at Dongguk Business School. “But policymakers underestimated the products’ ability to generate new demand. They attracted investors chasing quick gains from the volatility, creating speculative demand that likely wouldn’t have been created if the products had remained available only overseas.”

When the hype cools

The wild swings may be built into single-stock leveraged ETFs, but economists say regulators still have tools to mitigate excessive volatility.

One possible measure is to provide negative incentives for the creation of new shares of leveraged ETF products, according to Prof. Yoon.

ETF shares are created by authorized participants (AP), typically securities firms, which deliver underlying securities or cash to the issuer in exchange for new shares. The APs then sell those shares in the secondary market, helping keep the ETF’s market price close to its net asset value (NAV). Leveraged ETFs’ assets under management can also expand with market performance, as their NAVs rise at twice the underlying stock’s daily gains.

“To prevent the ETFs from growing rapidly, the regulators should consider introducing negative incentives that increase the burden on APs as the volume of new ETF creation rises, to curb excessive growth in issuance,” Yoon said.

“That may include imposing commission fees on APs when creating new shares to discourage excessive issuance, or having regulators issue verbal warnings when new share creation exceeds a certain threshold,” he added. While such measures could widen the gap between an ETF’s market price and its net asset value, “that may be a necessary sacrifice,” he added.

Some argue that the market volatility will ease as chip stocks cool and investor flows normalize.

“The initial surge in demand has already started to fade,” said Lee of the Korea Institute of Finance. "As net inflow has slowed, the products are becoming less of a driver of market volatility than they were at launch.”

Net capital inflows into Korea’s major single-stock leveraged ETFs have begun to lose momentum in recent weeks. Net inflows into the Kodex SK hynix Single Stock Leverage peaked at 1.27 trillion won in the fourth week of June before easing to 788.8 billion won in the first week of July, followed by 850.5 billion won in the second week, according to ETF Check data.

The Kodex Samsung Electronics Single Stock Leverage showed a similar pattern. After reaching a high of 891.7 billion won in the fourth week of June, net inflows more than halved to 321 billion won in the first week of July before edging up to 350 billion won in the second week.

“This volatility is part of the evolution of the capital market,” said Kim Yong-jin, a business professor at Sogang University. As Korea seeks an upgrade to developed market status on the MSCI index, the key issues highlighted by the index provider are market accessibility and diversity, he explained.

“The problem is not that Korea introduced these two products, but that they are the only options available. The United States has a much broader range of single-stock leveraged ETFs, including products with higher leverage and more diverse underlying assets. Korea needs to expand its product variety as well,” Prof. Kim added.

BY JIN MIN-JI [[email protected]]