SEOUL, June 24 (AJP) - South Korea's stock market is hot, volatile and increasingly dependent on borrowed momentum. Government-approved leveraged exchange-traded funds have added another layer of risk, producing side effects within weeks of their launch and prompting an unusual public mea culpa from regulators.
Single-stock leveraged ETFs tied to Samsung Electronics and SK hynix, which allow investors to bet on twice the daily movement of the shares, plunged 24 to 25 percent during this week's market rout, magnifying losses as the benchmark KOSPI suffered its worst one-day decline of the year.
The underlying shares rebounded on Wednesday, with Samsung Electronics rising 9.84 percent to 340,500 won and SK hynix gaining 0.98 percent to 2.58 million won. But the sharp swings have done little to ease concerns over the risks posed by leveraged investing concentrated around the country's AI champions.
The concerns have grown serious enough for regulators to publicly second-guess their own decision.
Financial Supervisory Service chief Lee Chan-jin said he regretted approving the products just weeks after their launch.
"The effect has been minimal, but the side effects have become too significant," Lee said.
"There is a risk that investors gain little while securities firms and liquidity providers earn most of the profits," he added.
"I should have stopped it through all means," he told reporters.
The Bank of Korea echoed those concerns on Wednesday. In its Financial Stability Report for the first half of 2026, it said that although the country's financial system remains broadly stable, rising leverage, growing stock-market speculation and increasing financial imbalances could become significant sources of instability amid heightened volatility in domestic financial and foreign-exchange markets.
The central bank identified leveraged stock investing as one of the biggest financial stability risks. Combined exposure to margin trading and leveraged ETFs surged to 74.8 trillion won ($55 billion) at the end of May, up 160.5 percent from a year earlier. Outstanding margin loans and unpaid margin balances alone climbed to a record 39.4 trillion won, while net assets in leveraged ETFs rose to 35.4 trillion won.
Borrowing for direct stock purchases has accelerated sharply since the second half of last year as the market rallied, the central bank said, warning that highly leveraged investors could face significant losses if stock prices reverse and forced liquidations trigger a vicious cycle of selling pressure.
The issue extends far beyond South Korea. Leveraged ETFs have become one of the fastest-growing corners of global finance, turning market momentum itself into a tradable asset class. But their rapid expansion has revived an old question: At what point does leverage stop reflecting markets and start driving them?
Assets in leveraged exchange-traded funds worldwide have surpassed $290 billion, according to Bloomberg, with the United States accounting for more than $220 billion and Asia about $45 billion.
Yet the same mechanism that boosts returns during rallies can accelerate declines during periods of market stress.
Unlike conventional ETFs, leveraged ETFs automatically buy or sell underlying assets to maintain their target leverage as markets move. This can add buying pressure when markets rise and increase selling pressure when markets fall, creating self-reinforcing cycles that amplify market swings. Analysts warn such feedback loops can be especially powerful in markets heavily concentrated in a handful of stocks, such as South Korea's semiconductor sector.
Nomura estimates leveraged ETFs generate roughly $9 billion in rebalancing demand for every 1 percent move in the market. Barclays strategist Alexander Altmann said daily rebalancing flows in U.S. leveraged ETFs have averaged about $20 billion over the past 10 trading sessions, roughly four times the annual average.
Altmann warned that the rapid expansion of leveraged ETFs has created a classic "tail-wagging-the-dog" scenario, where leverage no longer follows markets but increasingly dictates them, turning momentum into a self-fulfilling prophecy regardless of corporate fundamentals.
Nomura strategist Charlie McElligott warned that South Korea has become one of the epicenters of the AI-driven trading boom, where the structural dynamics surrounding leveraged ETFs are amplifying volatility and creating a "butterfly effect" that extends far beyond the local market.
Those concerns have become more acute since South Korea introduced 16 single-stock leveraged and inverse ETFs tracking Samsung Electronics and SK hynix in late May. Assets in the products have already tripled to more than $9 billion from around $3 billion at launch.
Their rapid growth has coincided with increasingly speculative trading behavior.
According to the Financial Supervisory Service, the average daily turnover ratio of single-stock leveraged ETFs reached 122.5 percent between May 27 and June 12, with some sessions nearing 200 percent — a pace more typical of short-term speculation than traditional ETF investing.
Regulators worry the products, which are overwhelmingly held by retail investors, could magnify losses during periods of market stress. More than 90 percent of holders are individual investors, and assets in the products have already exceeded 14 trillion won.
Among the measures under review are raising the current 10 million won minimum deposit requirement, expanding mandatory investor education, restricting additional single-stock leveraged ETF listings and imposing higher fees to discourage excessive short-term trading.
Kim Tae-gi, an economics professor at Dankook University, said the recent turmoil reflects broader flaws in how leveraged investing expanded, arguing that policymakers failed to put adequate safeguards in place as speculative trading accelerated.
"The problem isn't the ETFs themselves. It's that leveraged investing was introduced without enough safeguards," Kim said.
He argued that policymakers should focus less on tightening regulations after the fact and more on restoring market discipline. Raising entry barriers or expanding investor education alone would do little if speculative incentives remain intact.
"The focus should not be on imposing more regulations, but on restoring market discipline and ensuring that speculative trading does not undermine market stability," Kim said. "Otherwise, the stock market could become even more fragile."
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