700,000 Korean Retail Investors Wiped Out by Leveraged ETF Collapse! KOSPI Drops 40% in a Month, Government Unveils Five 'Market Rescue Measures'

South Korea's stock market is experiencing its most severe leveraged product deleveraging since 2008, with the Korea Composite Stock Price Index (KOSPI) falling about 40% from its June high of 9,115 points. The worst-hit products are single-stock leveraged ETFs linked to Samsung Electronics and SK Hynix, which were approved in May. These 2x leveraged products attracted retail investors during market rallies, but during the downturn, daily rebalancing triggered forced liquidations, doubling losses on retail investors' accounts.

According to data from JPMorgan and Goldman Sachs, the asset size of leveraged ETFs in South Korea plummeted from a peak of $52.5–53 billion on June 22 to around $15–16 billion by the end of July, a contraction of nearly 70%. The proportion of leveraged positions relative to free-float market capitalization dropped from 3.2% to about 1.5%.

Citigroup estimates that retail investors have incurred cumulative losses of approximately 56.3 trillion Korean won (38.7 billion USD) through leveraged ETFs. Korea Investment & Securities revealed that nearly half of its 880,000 Samsung shareholders and nearly 70% of its 408,000 SK Hynix shareholders are now in loss positions. Around 700,000 retail investors are trapped in margin calls, with protesters even placing mourning wreaths in front of the National Assembly.

JPMorgan data shows that leveraged ETF assets surged from under $10 billion at the beginning of 2026 to over $50 billion by June, then plunged to around $16 billion by the end of July—a decline of nearly 70% from the peak.

Young Jae Lee, Senior Investment Manager at Pictet Asset Management in London, pointed out that massive retail buying of leveraged ETFs increased market volatility and forced foreign funds to sell off heavily. 'For retail investors, this is a lose-lose game,' he said.

Mounting political pressure has prompted government action. South Korea's Minister of Economy and Finance, Gu Un-cheol, convened an emergency meeting with the central bank, Financial Services Commission, and Financial Supervisory Service on Wednesday night (29th), announcing the highest-level alert and 24-hour monitoring. The government unveiled five 'market rescue tools':

National Stabilization Fund: 10 trillion won ($6.9 billion) set aside—the last time it was activated was during the 2008 crisis.

Short-selling ban: The Korea Exchange (KRX) is internally evaluating a preventive suspension of short-selling and narrowing daily price limits by 30%, though the exchange denies receiving official instructions.

Leveraged ETF restrictions: Halt new product listings, cap stock holdings at 20% of total assets, increase trading costs, and mandate simulation trading training.

Margin adjustments: Tighten retail margin lending thresholds or temporarily relax collateral rules for brokers to prevent mechanical margin calls.

Easing share buyback rules: Encourage companies to accelerate the cancellation of treasury shares.

Analysts widely believe that given the government's prior encouragement of retail participation in the AI and memory chip boom, the likelihood of direct intervention is rising.

Notably, as selling continues and regulation tightens, new capital inflows into leveraged ETFs have clearly slowed or even reversed, reducing the risk of further leverage-driven sell-offs. However, analysts warn that market volatility remains significant.

Balancing market stability with the avoidance of moral hazard will be a difficult choice for Seoul authorities caught between political pressure and market logic.