KOSPI Plunges Over 43% From Peak, South Korean Retail Investors Suffer Heavy Losses, Leveraged ETFs Lose 56 Trillion Won

South Korea's benchmark KOSPI index faced heavy selling pressure on Wednesday (29th), plunging over 12% at one point and breaking below the 5,300 level, marking a cumulative decline of over 43% from its historical peak. Mega-cap stocks Samsung Electronics and SK Hynix dropped nearly 13% and over 18%, respectively.

According to a report by Muhammed Apabhai, Head of Asia-Pacific Trading Strategy at Citigroup Global Securities, the total market value of leveraged ETFs linked to South Korean assets peaked at $52.5 billion (approximately 76.37 trillion won) on June 22, but has since shrunk dramatically to $19 billion (about 27.64 trillion won).

Apabhai noted that factoring in approximately $6.2 billion in new subscriptions during the downturn, the total losses incurred by South Korean retail investors on leveraged ETFs are estimated at 56.3 trillion won. Among these, the leveraged ETF tracking SK Hynix saw its market value shrink by $17 billion—the largest decline in the market—while products linked to the KOSPI 200 index and Samsung Electronics lost $10.5 billion and $5 billion, respectively.

Market data reflects extremely low investor sentiment. As of the 27th, 42% of the approximately 872,000 Samsung Electronics investors were in loss, while 57% of the 400,000 SK Hynix investors were underwater.

Additionally, over 1.2 million leveraged trading accounts breached margin call thresholds in early July, with an estimated 320,000 to 460,000 accounts forcibly liquidated by brokers due to insufficient funds, resulting in total loss of principal. The 'investor escrow funds,' a key indicator of market liquidity, also fell to 105.6 trillion won—the lowest in five months.

This sharp volatility in the South Korean stock market has been partly attributed to the 'daily rebalancing' mechanism of single-stock leveraged ETFs. To maintain a fixed leverage ratio, fund managers must buy more when prices rise and sell when prices fall, creating a mechanical 'buy high, sell low' effect.

South Korea's Finance Minister Choi Sang-mok apologized in parliament for the market instability caused by the introduction of single-stock leveraged ETFs without sufficient scrutiny and pledged to review regulations to stabilize the market.

In response to the turmoil, the Financial Services Commission (FSC) announced it would raise the minimum initial margin requirement for single-stock leveraged ETFs from 10 million won to 30 million won, prohibit the use of government bonds as collateral, and suspend approvals for new products of this type.

Apabhai predicts that the total market value of leveraged ETFs across South Korea is highly likely to fall below $8 billion by year-end.

Minsheng Banking International warns that despite tighter regulations and pension funds turning into net buyers, leveraged trading in the semiconductor sector has not been fully unwound. If AI spending or external economic conditions shift, Korean equities may still face significant volatility.