South Korea's retail investors are feeling the heat as their leveraged bets on AI-driven chip giants Samsung Electronics and SK Hynix unravel. The KODEX SK Hynix Single Stock Leverage ETF, designed to mirror the daily performance of SK Hynix shares, has plummeted by 70% from its peak in June, leaving investors with steep losses. This isn't an isolated incident; since May 27, Korean retail investors have poured a net 14 trillion won into single-stock leveraged ETFs, compared to foreign investors' 2 trillion won. The situation has raised concerns about the risks of speculative trading and the impact on South Korea's technology-heavy market.
The pain is particularly acute for those holding these ETFs, with investors expressing frustration and despair on online forums. The losses highlight the amplified volatility experienced by South Korea's retail investors, who have been heavily exposed to the country's technology sector. Jung In Yun, founder of Fibonacci Asset Management, emphasizes that the majority of these investors are domestic retail investors, not novice traders.
The rise of leveraged ETFs in South Korea has been rapid, with assets in the 25 largest leveraged Korea ETFs reaching a 30% share by June. This surge in speculative trading has caught the attention of regulators, who have introduced tougher rules for single-stock leveraged ETFs. The new measures require investors to post a minimum of 30 million won in cash to trade these products, up from the previous effective minimum of 3 million won.
Peter Kim, head of global investment strategy at KB Financial Group, warns that the losses and volatility could lead to a prolonged slump if the overhang on ETFs persists. Thomas J. Hayes, chairman and managing member of Great Hill Capital, agrees, stating that memory-chip stocks have become the most crowded trade globally, and the unwinding of this bubble could have further to run. The South Korean central bank has also cautioned about the risks of leverage magnifying volatility during market corrections, particularly when fear of missing out drives investors to chase rallies with borrowed money.
This situation raises deeper questions about the role of retail investors in South Korea's equity market and the potential consequences of speculative trading. As the market adjusts, investors are left to grapple with the aftermath of their leveraged bets, leaving a trail of caution for those who follow.
