Inside South Korea’s risky ETF boom

AS artificial intelligence (AI) investment continues to reshape global equity markets, a new breed of exchange-traded funds (ETFs) is emerging as a powerful force behind some of Asia’s biggest technology stocks.

Their rapid rise is creating fresh opportunities for investors, but also raising questions about whether financial innovation is beginning to amplify market risks instead of simply tracking them.

According to a recent Reuters report, leveraged single-stock ETFs have become one of the biggest drivers of trading activity surrounding South Korea’s semiconductor giants, injecting both momentum and volatility into a market already riding the AI boom.

Originally introduced in the United States in 2022, single-stock leveraged ETFs have found particularly fertile ground in Asia. Investors seeking bigger returns from AI-related stocks have increasingly turned to products linked to Samsung Electronics Co Ltd and SK Hynix Inc, two companies sitting at the heart of the global memory chip industry.

Unlike conventional ETFs, which simply track an index or a basket of shares, leveraged ETFs promise to multiply an underlying asset’s daily return — commonly by two or three times, and occasionally even more.

To achieve this, fund managers use derivatives such as futures and swaps alongside borrowed exposure.

That structure makes them attractive for traders looking to maximise short-term market moves. But it also creates an important side effect.

Every day, the funds must rebalance their holdings to maintain the promised leverage. If the underlying stock rises, the ETF has to buy more shares and derivatives. If the stock falls, it must sell.

Those compulsory trades can reinforce existing market trends, creating a feedback loop that pushes prices further in either direction.

Driving volatility

Reuters reports that this mechanism has become increasingly influential in South Korea, where Samsung and SK Hynix together account for more than half of the benchmark Kospi.

Michael Green, chief strategist and portfolio manager at Simplify Asset Management, tells Reuters the products are “creating an incredible feedback loop that’s driving volatility in the semiconductor space”.

“That’s driving elevated levels of volatility on a single-stock level,” he says.

The impact is becoming increasingly visible across trading activity.

Reuters calculations show Samsung and SK Hynix together account for more than 80% of Kospi trading volume on certain days this year, illustrating how heavy market activity has become concentrated around the country’s two semiconductor champions.

The surge has coincided with extraordinary swings in volatility. Reuters notes that the Kospi’s volatility index has spent six consecutive weeks above 80, reaching a record high of 97.99 on June 19 after historically remaining below 30 for decades.

Much of the attention has centred on Hong Kong-listed leveraged ETFs tracking SK Hynix.

Reuters reports that the two-times leveraged ETF offered by fund manager CSOP has grown into the world’s largest fund of its type. Assets under management expanded roughly 20-fold before peaking in late June, reflecting investors’ enthusiasm for AI-related semiconductor plays.

The momentum, however, has proved just as powerful on the way down.

Since its late-June peak, the ETF has fallen by approximately 83%, although it still manages HK$31.9bil (US$4.09bil) in assets.

Reuters also reports that SK Hynix shares have halved from their late-June highs, with the ETF’s rebalancing activity accelerating selling pressure as markets retreat.

Rising popularity

The phenomenon highlights both the attraction and the risks of leveraged investing.

Asset managers generally market these products as trading tools for professional investors or sophisticated market participants rather than long-term savers.

Most products carry prominent warnings that they are unsuitable as buy-and-hold investments because the cost of maintaining leveraged exposure gradually erodes returns, causing performance to diverge from the underlying stock over longer periods.

Nevertheless, Reuters notes that many retail investors have embraced the products in pursuit of amplified AI-driven gains.

The popularity of leveraged ETFs has also expanded geographically.

South Korea only launched its own single-stock leveraged ETFs in May this year, following earlier introductions in Hong Kong during 2025.

Meanwhile, SK Hynix’s Nasdaq debut in July has opened another avenue for similar products in the United States, adding yet another source of trading activity surrounding the stock.

The growing scale of these products is beginning to attract closer regulatory scrutiny.

Reuters reports that South Korea’s Financial Services Commission introduced measures during July aimed at cooling the market, including banning promotional events for single-stock leveraged ETFs and discouraging additional product launches.

The country’s finance minister later apologised before the National Assembly for insufficient consideration ahead of their introduction, signalling that further regulatory tightening remains a possibility if volatility persists.

Hong Kong regulators have also responded.

Reuters reports that authorities now require ETF managers, including CSOP, to manage leverage dynamically.

Although the products remain capped at two-times leverage, managers are expected to reduce leverage when markets become exceptionally volatile, an attempt to soften the feedback effects created by mandatory daily rebalancing.

As August unfolds, investors are likely to watch whether AI enthusiasm continues to outweigh mounting regulatory concerns.

Meanwhile, leveraged ETFs have already evolved beyond niche trading instruments into influential market participants, capable of shaping price movements in some of Asia’s most important technology stocks as much as responding to them.