South Korea’s stock market has experienced dramatic swings over the past two months. After the artificial intelligence (AI) frenzy propelled the index to a record high, it subsequently underwent a severe correction of nearly 30%. With retail investors suffering heavy losses, market participants and regulators are pointing fingers at the “single-stock leveraged ETFs” that made their high-profile debut in late May, viewing these high-risk financial products as the primary culprit behind the heightened market turbulence.<\/p>\n
South Korean President Lee Jae-myung has personally stepped in, demanding over two consecutive days that relevant ministries address the issue head-on, dropping a stronger political bombshell on the financial regulatory storm triggered by these leveraged products.<\/p>\n
Presidential Office Scrambles to Contain Fallout, Lee Jae-myung Issues Directives Over Two Days<\/p>\n
According to a report by the Korean Broadcasting System (KBS), Lee Jae-myung, while presiding over a Cabinet meeting on the 21st, stated bluntly that leveraged ETFs “amplify rallies and exacerbate sell-offs,” unnecessarily intensifying market instability. He stressed that since a broad base of investors believes this policy has worsened stock market volatility, expanded the magnitude of declines, and even led to total loss of principal, the government has an obligation to propose corresponding remedial measures.<\/p>\n
Lee Jae-myung noted that after these financial products were listed on May 27, their popularity peaked on June 22, after which stock prices went into a freefall. Beyond expressing skepticism about the remedial measures proposed by the government last week\u2014such as raising the investment threshold for leveraged ETFs\u2014and suggesting these measures alone may be insufficient, he urged relevant agencies to accelerate their efforts and devise more decisive countermeasures.<\/p>\n
Just one day later, on the 22nd, Lee Jae-myung further instructed a review of current policies and remedial plans. Market observers interpret the presidential office’s rapid, consecutive interventions as a signal that South Korea’s highest leadership now views this as a critical financial stability issue requiring priority attention.<\/p>\n
FSS Governor Admits Dereliction of Duty: “My Biggest Regret Is Not Doing Everything to Block the Listing”<\/p>\n
Amid this wave of criticism, the regulatory decision-making process has become the target of widespread condemnation. Lee Chan-jin, Governor of South Korea’s Financial Supervisory Service (FSS), recently admitted publicly: “My biggest regret is not doing everything in my power to block the listing of single-stock leveraged ETFs.” He even expressed his remorse more vividly at a press conference in June: “Perhaps I should have lain down on the ground to block it back then. I personally regret this.”<\/p>\n
In hindsight, Lee Chan-jin reflected that a more cautious assessment of the market impact of these products should have been conducted initially. However, the regulatory authority also stated that once a product is listed, adjustments involving investor rights and market operations must follow statutory procedures. Some commentators have drawn an analogy to the story of Frankenstein, suggesting that regulatory bodies should continuously review institutional design and market impact even after a financial product’s launch, rather than proposing remedial measures only after problems arise.<\/p>\n
Policy Intent vs. Brutal Reality: From “Attracting Capital Back Home” to a “Vicious Cycle”<\/p>\n
The policy intent behind these controversial leveraged ETFs was not entirely unreasonable. Market sources indicate that Kim Yong-beom, Presidential Policy Chief, stated in an interview this February that the purpose of promoting single-stock leveraged ETFs was to attract investment funds flowing to overseas markets back to South Korea, thereby alleviating pressure on financial markets and exchange rates caused by capital outflows.<\/p>\n
However, the reality following the products’ launch proved far more brutal than anticipated. South Korea rolled out 16 “single-stock 2x leveraged ETFs” in late May, primarily targeting AI memory chip leaders like Samsung Electronics and SK hynix. These products allow investors to achieve twice the daily return of a single stock, but they also entail twice the losses.<\/p>\n
A massive wave of retail investors quickly flooded in, causing capital to become highly concentrated in large-cap heavyweight stocks. When stock prices fell, the leveraged ETFs, in order to maintain their fixed leverage ratio, were forced to dump more shares into the closing market, causing selling pressure to further depress spot prices and triggering additional capital flight. This created a vicious cycle of “the more it falls, the more they sell; the more they sell, the deeper it falls.”<\/p>\n
According to statistics, since the related ETFs were listed on May 27, shares of Samsung Electronics and SK hynix have fallen approximately 16% and 20%, respectively. For investors employing 2x leverage, the magnitude of losses has been multiplied accordingly.<\/p>\n
Broad Market Swings Wildly, KOSDAQ Liquidity Raises Alarm<\/p>\n
The capital concentration effect triggered by leveraged products has not only severely wounded retail investors but has also impacted the overall market structure. Driven by significant gains in Samsung Electronics and SK hynix, the Korea Composite Stock Price Index (KOSPI) surged dramatically this year, with gains reaching as high as 58% at one point, hitting an all-time high of 9,385 points on June 19.<\/p>\n
However, this rally was accompanied by violent volatility. From its historic peak to the morning of July 21, the KOSPI had corrected by approximately 28%. During this period, the “sidecar” circuit breaker mechanism was triggered multiple times due to extreme market turbulence.<\/p>\n
On the other hand, with capital excessively concentrated in a handful of large-cap heavyweights, trading volume for small- and mid-cap stocks has been noticeably squeezed, and liquidity in the KOSDAQ market has also shown warning signs of decline.<\/p>\n
Reform Measures Criticized as Insufficient, Civic Groups Demand Root-and-Branch Solutions<\/p>\n
Faced with market turmoil, the South Korean government last week urgently tightened relevant regulations, significantly raising the minimum margin requirement for investing in single-stock leveraged ETFs to \u20a930 million (approximately $20,311) and restricting it to cash only, in an attempt to cool retail investors’ speculative fervor.<\/p>\n
However, this measure has been criticized externally as too little, too late. Lee Jae-myung also publicly questioned whether these remedial measures, which are not immediately effective and require waiting periods, are sufficient, urging relevant agencies to devise more decisive countermeasures.<\/p>\n
Economic Democracy 21, a South Korean non-governmental organization, leveled even harsher criticism. The organization issued a statement pointing out that the government failed to fulfill its duty to protect individual investors when launching such leveraged ETFs. The statement emphasized that regulators should be more cautious, as such products are “inherently high-risk, and compounding effects can wipe out an investor’s principal in a short period.” The organization further lambasted single-stock leveraged funds, stating they “fundamentally conflict with the diversification requirements of traditional public offering funds, and this ETF structure itself is unacceptable.”<\/p>\n
Analysts point out that amid the growing prevalence of leveraged financial products, balancing market innovation, investor protection, and financial stability will continue to test the wisdom and resolve of South Korea’s financial regulatory authorities.<\/p>\n","protected":false},"excerpt":{"rendered":"South Korea’s stock market has experienced dramatic swings over the past two months. After the artificial intelligence (AI)…\n","protected":false},"author":2,"featured_media":95211,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[2497,31,336,335,35012,146,276,40757,275,33,41248],"class_list":["post-95210","post","type-post","status-publish","format-standard","has-post-thumbnail","category-south-korea","tag-kim-yong-beom","tag-korea","tag-kosdaq","tag-kospi","tag-lee-chan-jin","tag-lee-jae-myung","tag-samsung-electronics","tag-single-stock-leveraged-etfs","tag-sk-hynix","tag-south-korea","tag-south-koreas-financial-supervisory-service"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/95210","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/comments?post=95210"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/95210\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media\/95211"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media?parent=95210"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/categories?post=95210"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/tags?post=95210"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}