South Korea’s KOSPI Crash Exposes the Hidden Risk Behind the AI Chip Rally

South Korea’s KOSPI fell 9.99% on June 23, its steepest drop in more than three months, after regulators warned that leveraged exchange-traded funds tied to major chip stocks had helped make the market dangerously volatile. The index closed down 910.71 points at 8,203.84, while Samsung Electronics and SK Hynix each lost more than 12%. The selloff was sharp enough to trigger a 20-minute bourse-wide trading halt, showing how quickly sentiment reversed after the index had climbed above the 9,100-point level just one day earlier.

The crash was not only about one bad trading session. It revealed how concentrated South Korea’s market had become around two semiconductor giants. Samsung and SK Hynix now represent more than half of the KOSPI’s market value, after investors poured into AI-related chip stocks on expectations of long-term demand for memory, data-center hardware and high-bandwidth memory. That concentration created a powerful upside engine during the rally, but it also meant that when investors sold the chipmakers, the whole market fell with them.

Leveraged ETFs made the situation more fragile. South Korea’s Financial Supervisory Service had recently allowed leveraged funds linked to major chip stocks, but its governor later admitted the approval process had been too rushed. These products magnify returns and losses, attracting retail investors during rising markets but increasing the risk of forced selling and volatility when prices turn. Regulators had already warned investors about leverage as margin debt hit record levels, with borrowed retail investment into equities reaching around 60 trillion won by the end of May.

The broader financial impact goes beyond equities. The Korean won has weakened 6.5% against the dollar this year, while the KOSPI had still been up nearly 95% for 2026 even after the drop. That combination shows a market that had become extremely hot despite currency weakness and foreign investor caution. In debt markets, Korean treasury bond yields fell as investors moved toward safer assets, suggesting that the equity selloff was not viewed as a small correction but as a serious risk event tied to positioning and leverage.

The episode also complicates South Korea’s ambition to upgrade its market status with MSCI. President Lee Jae Myung’s administration has been pushing reforms to improve market access and reduce the “Korea discount,” but extreme volatility makes that goal harder to achieve. MSCI has continued to cite issues such as offshore currency access and operational limitations for global investors. For investors, the lesson is clear: South Korea remains one of the world’s most important AI supply-chain markets, but a chip-led rally powered by leverage can turn unstable fast when regulation, foreign selling and retail momentum collide.