South Korea’s stock market experienced another dramatic roller-coaster ride on Tuesday (July 14), a day after suffering a historic nearly 9% crash on Monday (July 13). The KOSPI index plunged as much as 5% in early trading but reversed course to close up 0.73% at 6,856.83 points, driven by heavyweight stocks Samsung Electronics and SK hynix, which both swung from losses to gains. However, beneath the surface of this sharp rebound, structural issues stemming from persistent foreign capital outflows and leveraged ETFs (exchange-traded funds) continue to fester, casting a shadow over the market’s outlook.
Data released by the Bank of Korea on the same day showed that foreign investors net sold USD 30.72 billion (approximately TWD 990 billion) in South Korean stocks and bonds in June, marking the fifth consecutive month of net selling. Equities bore the brunt of the exodus, with a net sell-off of USD 32.37 billion (approximately TWD 1 trillion), while bonds saw a modest net inflow of USD 1.65 billion (approximately TWD 53 billion). Compared to the net outflow of USD 26.15 billion (approximately TWD 840 billion) in May, the scale of capital flight expanded further in June, reflecting a persistently conservative stance among overseas investors toward South Korean equities.
The Bank of Korea analyzed that growing concerns over overheated investment in artificial intelligence (AI) infrastructure have cooled investor risk appetite, thereby amplifying foreign selling pressure. Furthermore, after South Korean stocks surged significantly, led by the tech sector, many foreign investors opted to rebalance their portfolios by reducing their holdings, accelerating the capital outflow.
The immediate trigger for the market’s violent swings was memory chip leader SK hynix. On Monday, SK hynix shares plummeted 15.37% after domestic brokerage Korea Investment & Securities (KIS) lowered its second-quarter profit estimates, dragging the KOSPI index down 8.95%—its sixth-largest single-day drop in history. On Tuesday, bargain hunters stepped in after the sharp decline, quickly narrowing intraday losses and pushing the stock into positive territory, with SK hynix closing up over 3%. Samsung Electronics also shook off early weakness to finish up more than 3%. These two stocks were the only gainers among the top 30 index constituents (KTOP30), propelling the electronics sector up 2.76% and making it the biggest center of buying interest among the 19 major industry groups.
Other sectors broadly came under pressure. The transportation equipment sector, dominated by automakers, plunged 4.09%, emerging as the biggest drag on the market. Hyundai Motor and Hyundai Mobis tumbled 4.39% and 4.41%, respectively, while Hanwha Aerospace cratered 6.84%, making it the weakest performer in the KTOP30. The chemicals sector fell 3.24%, with SK Innovation sinking 4.81%. The medical testing and device sector edged up 0.61%, joining electronics as the only two sectors to close in positive territory.
Despite Tuesday’s positive close, the KOSPI has retreated roughly 30% from its historic peak in June, teetering on the edge of a bear market. Market participants are pointing to the “single-stock leveraged ETFs” officially launched on May 27 as the culprit behind the recently amplified volatility. Due to their daily rebalancing mechanism, these products are forced to reduce positions when stocks like Samsung Electronics and SK hynix fall sharply, further intensifying selling pressure on the index and creating a vicious cycle.
According to statistics, since the launch of single-stock leveraged ETFs, the proportion of trading days where the KOSPI fluctuates more than 3% has surged from 27% to 52%. The sell-side temporary trading halt mechanism (SIDECAR) has been triggered 35 times this year, exceeding the 26 times recorded during the 2008 global financial crisis. Market-wide circuit breakers have also been activated seven times this year, far above historical averages.
Shinhan Securities analyst Park Woo-yeol noted: “Because Samsung and SK hynix account for an extremely high proportion of the KOSPI index, the impact of single-stock leveraged products on the index is far greater than in other countries.” By comparison, even a massive U.S. stock like Nvidia only accounts for about 7% of the S&P 500 index. Samsung Electronics and SK hynix currently represent more than half of the KOSPI’s total market capitalization, meaning that violent swings in either stock can dictate the overall market direction.
The risks posed by leveraged ETFs have put South Korea’s regulatory authorities on high alert. Market sources indicate that the “F4″—comprising the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea, and the Financial Supervisory Service—will convene a market condition review meeting on Thursday (July 16) to discuss measures such as raising margin requirements, limiting price fluctuations, and reducing leverage ratios. Financial Supervisory Service Governor Lee Chan-jin also stated publicly that false or exaggerated advertising by asset management companies is an extremely serious issue from an investor protection standpoint, emphasizing that the industry must undertake special self-regulatory rectification for actions that disrupt market order.
Opposition People Power Party floor leader Chung Jeom-sik strongly criticized the government in the National Assembly, calling the forced introduction of single-stock leveraged ETFs for Samsung Electronics and SK hynix “the worst decision that has turned the stock market into an abnormal casino.” He noted that the opposition and experts have been warning since last year about the need to be vigilant against excessive volatility lurking behind the KOSPI index.
The financial industry has also called for strengthened investor protection mechanisms for leveraged ETFs, including higher minimum margin requirements, individual investment caps for investors, and enhanced pre-investment education, all viewed as viable improvement measures. The 14 single-stock leveraged ETFs tracking Samsung Electronics and SK hynix all plunged to historic lows during Monday’s crash, with substantial market value evaporating from these products.
On a separate note, the South Korean government raised its economic outlook for the year on the same day, projecting that GDP growth could reach 3% in 2026, up from the 2% forecast earlier this year, driven by robust chip exports and fiscal stimulus policies. The full-year consumer price inflation forecast was also raised from 2.1% to 2.6%. However, the market is currently more focused on the Bank of Korea’s interest rate decision later this week. Most analysts expect the central bank to deliver its first rate hike in over three years, given that inflation remains above the 2% target.
Bank of Korea Governor Shin Hyun-song recently stated that foreign investors have been selling as they reduce their holdings following excessive gains in South Korean stocks, but he expects foreign selling pressure to ease in the second half of the year.
This margin-fueled rally in South Korean stocks, heavily concentrated in just two names—Samsung Electronics and SK hynix—and increasingly disconnected from the real economy, has kept regulators on edge and exposed investors to the risk of violent swings. Given the amplifying nature of leveraged products on both the upside and downside, South Korea’s stock market is unlikely to escape its roller-coaster pattern of boom-and-bust in the near term.