Photo: Enguerrand Artaz © LFDE

By Enguerrand Artaz, Strategist, La Financière de l’Échiquier (LFDE)

4.1%. That is the average daily move, up or down, of South Korea’s benchmark stock index, the Kospi, since the beginning of July. By comparison, the average absolute daily move of a global equity index over the long term is about 0.6%[1]. This instability in the Korean index is due largely to the extreme volatility of its two semiconductor heavyweights, SK Hynix and Samsung Electronics. Behind these erratic swings lies not a fundamental shift – although questions are emerging over future semiconductor demand – but rather the now out-of-control use of leveraged ETFs. While these products are not new globally, they have recently taken on a very particular dimension in South Korea.

First, it should be noted that these are essentially ETFs (or ETNs) based on a single stock, rather than a diversified index, with leverage of 2 on the upside or downside (the maximum allowed in South Korea) — in other words, delivering twice the underlying share’s daily move. These instruments have been authorised in South Korea since a reform that came into force on 28 April 2026 and began trading on 27 May. Samsung Electronics and SK Hynix — the only names meeting the criteria for market capitalisation, liquidity and derivatives-market depth — are the only eligible underlyings for these instruments, whose success has far exceeded the expectations of the Korean authorities. The original reform authorising these products was chiefly aimed at boosting competitiveness, as Korean investors were already able to buy foreign single-stock leveraged products, whereas Korean rules had previously required an underlying basket of at least 10 stocks and a maximum weight of 30% per name.

But this deregulation came at a time when, fuelled by global investors’ insatiable appetite for semiconductors, speculation in the Korean market was already in full swing and volumes were surging. With assets under management multiplying by 2.7 between end-May and mid-July (and by almost 4 at the peak of the Korean market at the end of June), these leveraged ETFs came to account for nearly 40% of all ETFs traded in Korea — a frenzy that significantly amplified market moves. The implied volatility index for the Kospi 200 thus climbed above 90 at the end of June, while the market was still rising — a level never before reached, even at the peak of the 2008 crisis and the 2020 pandemic. Faced with this extreme volatility, and as SK Hynix and Samsung Electronics have posted sharp declines since the end of June — generating cumulative unrealised losses on leveraged ETFs estimated at nearly 2,700 billion won (€1.6 billion) — the Korean authorities have decided to call time on the game.

On 16 July, a series of measures was announced with the aim of significantly curbing the use of these instruments. On the one hand, the authorities intend to substantially increase the minimum ticket size in order to reduce high-frequency, low-value transactions, by tripling the minimum deposit required — now to be made exclusively in cash — and moving to a lot size of 20 shares (versus 1 previously). On the other hand, they announced a temporary suspension of any new instrument listings and an immediate ban on advertising for these products.

These measures should help calm the frenzy that has gripped the Korean market in recent weeks, even if they will not put an end to the speculative enthusiasm around Samsung Electronics and SK Hynix, which began well before these instruments were authorised. Above all, this episode is a textbook case for investors. It is a reminder that even when fundamentals remain very strong – as is the case for Korea’s semiconductor leaders – market structure can be heavily affected by excessive leverage, feverish speculation and uncontrolled volatility. A low-cost warning at this stage, but one that serves as a reminder to heed the lessons of the past — particularly those of periods that have witnessed major technological revolutions on a human scale.

Disclaimers: These LFDE data and opinions, as well as the sectors mentioned, are provided for information purposes only and therefore do not constitute an offer to buy or sell a security, investment advice or financial analysis. The opinions expressed are those of the author and in no way engage LFDE’s liability. Past performance is not a reliable indicator of future performance.

[1] Average daily absolute move of the MSCI World since 31/12/1990.

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