South Korea’s KOSPI Plunges 44% as Leveraged ETFs Trigger Retail Margin Crisis
A hyper-leveraged feedback loop centred on Samsung Electronics and SK hynix has upended South Korea’s markets, prompting urgent policy shifts and raising alarms for US investors with similar exposure.
South Korea’s benchmark KOSPI index has suffered a 44% decline from its June peak, a contraction described as more severe than the 2020 pandemic crash, before staging an 18% single-day rebound. The extreme volatility was driven by a hyper-leveraged feedback loop involving single-stock exchange-traded funds, primarily concentrated in Samsung Electronics and SK hynix, which together account for more than half of the KOSPI’s weighting.
The crisis disproportionately impacted retail investors, with over 1.2 million individuals, representing approximately 3.4% of the adult population, facing margin calls. These investors held 92% of the leveraged ETF positions involved in the downturn, resulting in estimated cumulative losses of $38 billion. The scale of the liquidation event was significant, with margin triggers affecting a far larger proportion of the retail base than was seen during the 2008 global financial crisis in the United States.
Market dynamics shifted dramatically following the launch of single-stock leveraged ETFs in May, a trend accelerated by the SK hynix initial public offering. By July, leveraged products and their underlying stocks accounted for 70% of total daily trading volume on the local exchange. The mechanical nature of these funds meant that declining stock prices forced issuers to sell shares into a falling market, amplifying downside risk and trapping traders in a cycle of forced liquidation.
In response to the turmoil, regulators suspended new single-stock leveraged ETF listings and raised deposit minimums to 30 million won. Authorities also established a debt-counseling hotline to assist affected investors. The severity of the situation prompted the South Korean government to issue a public apology, while National Assembly member Lee Jong-wook described the market environment as having turned into a "casino" during parliamentary hearings.
The event has drawn international attention, particularly regarding the rapid growth of leveraged ETF assets in the United States. Assets under management for US leveraged ETFs have surged 60% since March to a record $218 billion. Although these products represent just 1% of total ETF assets, they now generate 40% of all US ETF trading volume, prompting warnings that similar risks may be present in American markets.
