Two giants "kidnap" 40 trillion market: leverage ETF becomes the new "volatility amplifier" in the South Korean stock market

For a long time, the risk of South Korea's stock market relying on the two major chip giants has been repeatedly mentioned, but few people really paid attention until this turmoil caused by the Iran situation shook this nearly $4 trillion market. As investors try to clarify the root cause of this violent fluctuation - following a record-breaking plunge and the largest rebound since 2008 - a certain explanation is gradually gaining recognition: the influence of leveraged ETFs tied to SK Hynix and Samsung Electronics is increasing day by day. These two stocks together account for nearly 40% of the Kospi index weight, and even higher at 50% in the MSCI Korea index. Their performance has a significant impact on the overall market. Since South Korea prohibits leveraged ETFs on single stocks, investors have turned to similar products listed in Hong Kong. The combined assets under management of Southbound SK Hynix Daily Leveraged (2x) product and Southbound Samsung Electronics Daily Leveraged (2x) product reach $3.3 billion, ranking among the largest funds managed by Chinese asset management companies. However, their size also brings significant drawbacks: daily large-scale rebalancing trades to maintain the leverage ratio could exacerbate stock price volatility, especially in the last hour of trading. "The rapid expansion of leveraged ETFs tied to Samsung Electronics and SK Hynix is beginning to add a layer of structural volatility to the Korean market," said Jung In Yun, CEO of Fibonacci Asset Management Global. "Given the ultra-high weight of Samsung and SK Hynix in the Kospi index, this could create a feedback loop, amplifying index volatility and raising concerns about intensified volatility during periods of future pressure in the market." Leveraged products must rebalance their positions daily to maintain the target leverage ratio. After market declines, long leveraged funds typically reduce exposure by selling futures or underlying stocks, and the selling pressure caused by this mechanical operation may further deepen the decline. According to a report released last week by the trading department at UBK, on March 3, when the SK Hynix stock price plummeted by 16%, rebalancing trades of this nature accounted for as much as 60% of its volume in the last hour of trading. The report indicated that on other recent trading days, such trades accounted for about 30% of the volume. Leveraged ETF tracking the Korean market did not raise concerns until the end of last year when the Kospi index witnessed a globally acclaimed uptrend, prompting a surge in investor interest. Compilation data shows that as of March 5, 2026, such funds have attracted $4.4 billion globally year-to-date, on track to set quarterly records. Although this scale is less than 20% of the total inflow into ETFs, investors have noted that due to the daily rebalancing mechanism, their amplification effect on volatility far exceeds their scale. Despite the violent fluctuations in the market due to the Iran conflict and surging energy prices, investor enthusiasm remains undiminished. Compilation data indicates that in the past week, Southbound SK Hynix and Samsung products ranked second and fourth in terms of net inflows of leveraged ETF funds tracking the Korean market globally. There are other drivers behind the violent swings in the Korean market. After the Kospi index rose by nearly 140% by February 27, foreign investors began to profit-taking following the escalation of the Iran situation. At the same time, many retail investors who entered the market with record leverage financing were forced to liquidate urgently due to margin calls triggered by the sharp drop in stock prices. "This is a market driven by retail leverage," said Rob Li, managing partner at New York-based Amont Partners, referring to the Korean market. "When a large amount of leverage capital is involved, geopolitical shocks default to much more violent fluctuations." In addition to these factors, a meeting between Korean financial regulatory agencies and the industry focused on the risks of leveraged investments. With Seoul planning to allow local trading of such high-risk products - aimed at attracting retail capital and boost the stock market - there may be greater volatility in the future. Although retail capital is seen as the main driver of ETF inflows, Chan H. Lee, managing partner at Seoul-based hedge fund Petra Capital Management, believes that the violent fluctuations suggest that professional global macro and multi-strategy players active in Korea are the real drivers behind them. "These ETF users are likely to be so-called multi-strategy funds," Lee said. "Their leveraged operations combining global macro quantitative strategies lead to market up and down movements far more intense than when trading is done only by retail investors."