Korea chip rout exposes leveraged ETF contagion risk
A record plunge in SK Hynix shares has triggered forced selling by leveraged products, creating a 24-hour volatility loop between Wall Street and Seoul that risks exporting Asia's leverage-fueled fragility to global markets.
SK Hynix suffered a record 15% drop on Monday, forcing managers of leveraged products tied to Korean chipmakers to dump billions of dollars of stock. The forced selling accelerated a three-week, 25% slump in the Kospi index, highlighting the dangers of concentrated leverage in key AI hardware supply chain stocks.
The volatility is rooted in a rapid build-up of speculative instruments. Since late May, more than a dozen single-stock leveraged ETFs offering two times the returns of SK Hynix and Samsung Electronics have launched in Seoul, amassing over $14 billion in assets. These products, alongside a Hong Kong-listed SK Hynix 2x leveraged ETF that became the world's largest of its kind, have slumped roughly 40% since their debut.
Because SK Hynix and Samsung account for more than half of the Kospi, and SK Hynix trades in New York via ADRs, price swings now bounce between Wall Street and Asia around the clock. A 27% rebound in SK Hynix's ADRs on Tuesday, for example, fueled a 6% jump in the Kospi on Wednesday. This creates a near 24-hour feedback loop where US selloffs are amplified by Korean leverage and margin calls before being fed back into the US session.
The systemic risk is compounded by high margin debt. Borrowed money used to trade Korean stocks peaked above 38 trillion won ($25.4 billion) in June and remained elevated at 34.8 trillion won as of Monday. The combination of forced ETF liquidations and margin calls risks triggering a runaway selloff, heavily impacting local retail investors who have held these daily instruments longer than their design intends.
"Korean authorities are closely monitoring the impact of single-stock leveraged ETFs and will also discuss and decide if additional measures are needed," presidential policy chief Kim Yong-beom told reporters last week. However, regulators' options are constrained by the cross-border nature of the products.
"There isn’t a huge amount they can do without disrupting market structure but there are expectations that there will be additional investor education, limits on leverage and potentially a lowering of the leverage limit from 2 to 1.5 times," said Jon Withaar, a portfolio manager at Pictet Asset Management in Singapore. "It’s important to note though, there are leveraged ETFs both in Hong Kong and the US that they do not have jurisdiction over."
For global investors, the underlying business remains intact despite the market chaos. "South Korea’s semiconductor story is built on genuine structural demand, but an uncontrolled appetite for leverage has stretched it into a far more fragile market trade," said Hebe Chen, a senior market analyst at Vantage Global Prime. "The double-edged sword is now cutting the other way — and leverage is making the fall every bit as powerful as the climb."
"Whenever you have these kind of speculative products, it always ends in tears at some point when things turn," said Aadil Ebrahim, group head of equities at Klay Group in Singapore. "We’re having that tearing moment now with these leverage ETFs being forced to sell lower because the underlying is weaker. Nothing has changed on the fundamentals of the company."
