South Korean retail investors, who once rode high on the global AI wave, are now trapped in a deep winter triggered by high-leverage financial derivatives.
On Wednesday, July 29, the Korea Composite Stock Price Index (KOSPI) closed down 360.58 points, a drop of 5.99%, to 5,663.08 points, the lowest closing level since April 7, after plunging more than 12% intraday, triggering circuit breakers for two consecutive trading sessions. SK Hynix fell 9.6% after its earnings announcement, with an intraday drop of over 17%, a record single-day decline, while Samsung Electronics fell 5.2%.
Facing the chain reaction of consecutive plunges in chip stocks, South Korea's Finance Minister, Koo Yun-cheol, publicly expressed regret during a parliamentary hearing. He acknowledged that the government had "insufficiently considered" the risks when introducing single-stock leveraged ETFs earlier this year, failing to anticipate the destructive power of such products under extreme market volatility. Meanwhile, Chairman of the Financial Services Commission (FSC), Lee Bok-hyun, made a similar statement, admitting that regulators had fallen short in guiding public expectations and regulating high-risk products. According to a South Korean lawmaker, the finance minister, central bank governor, and heads of financial regulatory bodies will hold a meeting on Wednesday afternoon.
The epicenter of this storm is the "single-stock leveraged ETF," launched in South Korea on May 27. These products allow investors to take a leveraged position, doubling either the gains or losses on specific stocks. During the semiconductor industry's boom, South Korean retail investors piled in, hoping to leverage high returns from Samsung Electronics and SK Hynix. Data shows that since the product's launch, retail investors have net purchased 14 trillion won (approximately $9.7 billion), far exceeding the scale of foreign institutions.
However, the market sentiment has shifted dramatically over the past month, shattering the myth of chip stocks and causing catastrophic losses for leveraged investors heavily positioned in these names. On Wednesday, the benchmark Kospi index fell as much as 12.6%, marking one of its steepest declines in recent years. As heavyweight stocks, Samsung Electronics and SK Hynix could not escape the turmoil, with the former falling 14% and the latter, despite reporting record earnings, seeing its share price briefly crash nearly 20%.
For leveraged ETF holders, this has been nothing short of a massacre. The 2x leveraged ETF tracking SK Hynix has lost over 80% of its market value since its June peak, while the product linked to Samsung Electronics has also seen a decline of nearly 75%. This tool, intended to increase liquidity, has instead become a violent "short amplifier" in a declining market, exacerbating panic selling.
Under pressure from public opinion and market turmoil, South Korean regulators are now moving to "fix the fence after the horse has bolted." FSC Chairman Lee Bok-hyun revealed that regulators are reassessing the entry requirements for single-stock leveraged ETFs. One potential plan is to restrict these high-risk products to "professional investors" only, shutting out ordinary retail investors. Additionally, regulators are considering amending relevant laws to force a reduction in leverage multiples. Lee Bok-hyun stated bluntly: "The current two-times leverage ratio is too volatile in the current environment; reducing the multiplier is a necessary step to mitigate dramatic market swings."