Recess is over in South Korea
4.1 per cent. This is the average daily fluctuation – up or down – of the South Korean stock market’s flagship index, the Kospi, since the start of July. By way of comparison, the absolute daily change in a global share index over the long term averages around 0.6%[1] . This instability in the Korean index is largely due to the extreme volatility of its two semiconductor heavyweights, SK Hynix and Samsung Electronics. Behind these erratic movements lies not a fundamental shift – although doubts are emerging about future demand for semiconductors – but the now uncontrolled use of leveraged ETFs. Whilst these products are not new on a global scale, they have recently taken on a particularly significant role in South Korea.
Firstly, it should be noted that these are essentially ETFs (or ETNs) based on a single share, rather than a diversified index, with a leverage of 2 in either the long or short direction (the maximum permitted in South Korea); in other words, they track twice the daily price movement of the underlying share. These instruments were authorised in South Korea following a reform that came into force on 28 April 2026 and began trading on 27 May. As the only securities meeting the criteria for market capitalisation, liquidity and depth of the derivatives market, Samsung Electronics and SK Hynix are the sole eligible underlyings for these instruments, the success of which has far exceeded the expectations of the South Korean authorities. The initial reform authorising these products was, in fact, primarily aimed at enhancing competitiveness, as Korean investors were already able to purchase foreign single-share leveraged products, whilst Korean regulations had previously required an underlying basket comprising at least 10 securities, with a maximum weighting of 30 per cent per security.
However, this deregulation came at a time when, fuelled by global investors’ insatiable appetite for semiconductors, speculation on the Korean market was already in full swing and trading volumes had soared. With assets under management increasing 2.7-fold between late May and mid-July (and almost four-fold at the peak of the Korean market in late June), these leveraged ETFs came to account for nearly 40 per cent of the trading volume across all Korean ETFs. This frenzy significantly amplified market movements. The implied volatility index for the KOSPI 200 thus exceeded 90 at the end of June, whilst the market was still rising – a level it had never reached even at the height of the 2008 crisis or the 2020 pandemic. Faced with this extreme volatility, and with SK Hynix and Samsung Electronics posting sharp falls since the end of June – leading to cumulative unrealised losses on leveraged ETFs estimated at nearly 2,700 billion won (1.6 billion euros) – the South Korean authorities have decided to call time on the frenzy.
On 16 July, a series of measures was announced, with a view to significantly restricting the use of these instruments. On the one hand, the authorities aim to significantly increase the minimum trade size in order to reduce high-frequency trading of small amounts, by tripling the minimum deposit required – which must now consist solely of cash – and raising the minimum number of units to 20 (up from 1 previously). Furthermore, they have announced a temporary suspension of all new listings of securities and an immediate ban on advertising these products.
These measures should help to calm the frenzy that has gripped the Korean market in recent weeks, although they will not put an end to the speculative frenzy surrounding Samsung Electronics and SK Hynix, which began well before these instruments were authorised. This episode is, above all, a textbook case for investors. It serves as a reminder that even if the fundamentals remain very sound – which is the case for Korea’s leading semiconductor firms – market structures can be severely affected by excessive leverage, frenzied speculation and uncontrolled volatility. A relatively inexpensive warning at this stage, but one that serves as a reminder to learn from the lessons of the past. In particular, those from periods that have witnessed major technological revolutions on a global scale.
Draft completed on 17 July 202 6 | Enguerrand Artaz, Strategist, La Financière de l’Échiquier (LFDE)
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[1] Average daily change, in absolute terms, of the MSCI World Index since 31 December 1990.