South Korea cracks down on leveraged ETFs amplifying AI chip swings
South Korean regulators are restricting single-stock leveraged ETFs after these derivatives-fuelled products drove record volatility and accounted for over 80% of KOSPI trading volume on some days.
South Korea’s Financial Services Commission announced measures on Thursday to curb risks from single-stock leveraged ETFs, banning promotional campaigns and discouraging the launch of new products. The intervention targets a rapidly expanding market where derivatives-fuelled funds have severely distorted trading dynamics in Asia’s semiconductor sector.
Leveraged ETFs use futures and swaps to deliver multiples of an underlying asset's daily return. Because these funds must continuously rebalance to maintain their targeted leverage, they are forced to buy shares when prices rise and sell when they fall. This structural requirement amplifies price swings, particularly during the critical opening and closing minutes of the trading day.
The mechanical impact on South Korean markets has been profound. Samsung Electronics and SK Hynix both carry trillion-dollar market capitalisations and account for more than half of the benchmark KOSPI index. Their sheer weight means that leveraged ETF rebalancing has pushed the two stocks to represent over 80% of total KOSPI trading volume on certain days this year.
This concentrated trading has driven the KOSPI Volatility Index to 89 on Thursday, following a record high of 97.99 on June 29. That represents a massive jump from a reading of 28.85 at the end of 2025. The turbulence is not confined to Seoul. In Hong Kong, a CSOP-managed two-times leveraged ETF tracking SK Hynix has amassed HK$51.8 billion ($6.6 billion) in assets, making it the world’s largest single-stock leveraged ETF.
Despite carrying explicit warnings that they are unsuitable for long-term investing, these products have attracted heavy retail participation. Individual investors have largely ignored the structural costs of maintaining leveraged positions, which cause long-term performance to diverge negatively from the underlying stock, in pursuit of outsized AI-driven gains.
The regulatory pivot underscores a broader debate about passive, derivative-based products destabilising equity markets. It also marks an admission from the Financial Supervisory Service that its initial approvals were rushed. Authorities had previously fast-tracked these ETFs to attract retail capital back from US markets and to help support the Korean won. With SK Hynix now listed on the Nasdaq and subject to US leveraged ETFs, cross-border volatility risks are only likely to compound.
