Worst in Over 4 Months! South Korea's 'Black Tuesday' Sees KOSPI Crash Nearly 11%, Leveraged ETFs Halved to $26 Billion – Is Deleveraging Ending?

South Korea's stock market experienced a 'Black Tuesday' on the 28th, as the KOSPI index expanded losses to 8% by 9:14 a.m., triggering a circuit breaker. Trading resumed 20 minutes later, but the sell-off continued, marking the eighth such halt this year.

The downturn was driven by a sharp decline in chip stocks. KOSPI closed down 10.84%—its largest daily drop since March 4—with heavyweight stocks leading the fall: Samsung Electronics plunged 13.39% to 220,000 won, and SK Hynix tumbled 14.65% to 1,550,000 won.

Shortly after trading resumed, South Korea's Financial Services Commission (FSC) Chairman Lee Eog-weon signaled further tightening during a meeting in Seoul with brokers and asset managers.

According to an FSC statement, starting July 31, the minimum cash deposit for individuals trading single-leveraged ETFs will rise sharply from 10 million won to 30 million won. Stock or bond collateral will no longer be accepted. If this fails to curb demand, regulators may deploy a 'second-tier weapon,' including capping leveraged ETF holdings at a certain percentage of total investment assets (market estimates suggest around 20%), mandatory online training and simulated trading, new investment experience thresholds, and accelerating plans to increase the minimum trading unit from 1 to 20.

Goldman Sachs' 'Korea Weekly Kickstart' report, issued last Friday (24th), highlighted a key contradiction: although KOSPI fell 2% last week, foreign investors net bought approximately 2.329 trillion won, with tech stocks alone accounting for 1.865 trillion won. Retail funds saw a net inflow of 46.1 billion won, yet outflows persisted in consumer, steel, and chemical sectors.

The market decline occurred against a backdrop of 'foreign inflows + Alphabet increasing AI capital spending,' proving that selling pressure stems not from weakening AI semiconductor demand, but from domestic leveraged funds, ETF positions, and forced de-risking in a high-volatility environment.

The most striking data point is leveraged ETF AUM. South Korea's domestic and offshore leveraged ETFs ballooned from under $10 billion to a peak of $53 billion in the first half of the year, then halved to $26 billion in just over a month. Leveraged positions as a share of free-float market cap fell from 3.2% to 2.1%. Retail margin balances also dropped from a peak of $25 billion to $22 billion (0.5% of market cap). On Thursday (23rd), margin call demands as a share of receivables fell to 0.7%, but broker receivables remain at approximately 9 trillion won, with a 5-day average margin call ratio of about 2.7%. The most vulnerable segments have been cleared, but the chain has not fully unraveled.

Leveraged ETFs' daily rebalancing mechanism buys more during rallies and forces selling during declines. South Korean ETFs are heavily concentrated in Samsung and SK Hynix, causing algorithmic amplification of volatility in a few large-cap stocks.

Additionally, the VKOSPI fear index, which ranged between 10–30 from 2022 to 2024, has surged this year to nearly 100. Meanwhile, forward-looking valuation metrics (KOSPI at 6.1x, tech at 5.0x) are near historical lows, creating a core contradiction of high volatility coexisting with deep value.

Goldman data also shows foreign ownership of KOSPI semiconductor stocks at around 50.1%, a negative 1.8 standard deviations from the 2000-year average. Year-to-date foreign net flows have turned sharply negative, while short interest and activity have recently declined—indicating Korean AI memory assets are not victims of 'foreign investor stampede,' but rather in an underweight state after heavy outflows. If demand for HBM, server DDR5, and enterprise SSDs continues to materialize, this underweight position could become a catalyst for restocking.

JPMorgan estimates that $18 billion is a reasonable steady-state level for leveraged ETFs, suggesting about 75% of deleveraging is complete. However, the AUM contraction stems more from NAV declines than pure redemptions, meaning account-level deleveraging remains incomplete. The FSC’s decision to tighten rules on July 31 is aimed at locking the gate before retail investors rush back in.

South Korea’s market is transitioning from a 'leverage-fueled bull run' to an 'earnings verification phase.' The fundamentals of AI memory (Samsung and SK Hynix’s HBM pricing power and upcoming earnings) remain intact. Foreign investors are already rebuying tech stocks, but with $26 billion in leveraged ETFs, $22 billion in margin debt, and elevated VKOSPI, trading fragility persists.

Only after regulatory caps are enforced and tail risks from leverage are fully released will the market reprice 'strong fundamentals' using cyclical bottom multiples.