South Korean Retail Investors Flock to U.S. Stocks! SK Hynix ADR and 3x Leveraged ETFs Become Cash Magnets

The recent volatility in the South Korean stock market is prompting domestic retail investors to shift their funds to the U.S. market. Notably, while the funds are crossing borders, the investment themes remain unchanged. South Korean investors continue to view artificial intelligence (AI) and semiconductors as their primary betting directions, creating a "change the market, not the AI" capital movement.

According to data from the South Korean Securities Depository, South Korean investors net-bought U.S. stocks worth approximately $4.5 billion in July, a significant increase from June, nearing the peak of around $5 billion in January this year.

On the other hand, data from the South Korean exchange shows that retail investors in South Korea have been net-selling domestic stocks on most trading days last week, even as the Korean stock benchmark index has entered a technical bull market. However, foreign investors have turned to net buying.

One of the most notable trades was South Korean investors' purchase of approximately $840 million worth of SK Hynix's (000660KS) American Depositary Receipts (SKHY-US) in July. This trade was particularly noteworthy because SK Hynix is already listed on the South Korean exchange, meaning investors could have directly traded its South Korean stocks.

At the same time, the Direxion Daily 3x Semiconductor Bullish ETF (SOXL-US) also became one of the most popular U.S. stocks among South Korean investors in July, with four of the top ten net-bought stocks being leveraged products.

Analysts warn that while South Korean retail investors are moving their funds from the domestic market to U.S. stocks, they have not truly reduced their AI investment exposure. Instead, they may further amplify trading risks through ADR premiums and leveraged products.

SK Hynix ADR premium still popular. Analysts point to unusual situation

South Korean investors net-bought U.S. stocks worth approximately $4.5 billion in July, with about $840 million flowing into SK Hynix ADR, making it the second-largest net-bought U.S. security by South Korean investors that month.

This capital flow has raised questions in the market. Acadian Asset Management's Senior Vice President Owen Lamont pointed out that SK Hynix ADR has a premium of about 10% compared to its South Korean domestic stocks, and its price volatility is also larger.

Lamont believes that since investors can directly buy SK Hynix stocks in the South Korean market, choosing to pay a higher price to purchase U.S. ADRs does not conform to general investment logic. He even sees this price discrepancy as a signal of rising market speculation.

Lamont pointed out that such ADR price deviations are not common and recalled the market distortions seen in Indian company ADRs during the dot-com bubble. He believes that such trading behavior may be a typical symptom of the bubble formation process.

3x Leveraged ETFs become popular among South Korean retail investors. AI betting risks increase simultaneously

In addition to SK Hynix ADR, the enthusiasm of South Korean retail investors for high-leverage U.S. stock products has also become a market focus.

Data from the South Korean Securities Depository shows that in July, four of the top ten net-bought U.S. stocks by South Korean investors were leveraged products. Among them, the Direxion Daily 3x Semiconductor Bullish ETF ranked first, with the goal of targeting a 3x daily return of the semiconductor index.

The ProShares 3x Long NASDAQ ETF (TQQQ-US) and ProShares 2x Long Nasdaq-100 Index ETF (QLD-US) also ranked fourth and sixth, respectively. Additionally, the ProShares 2x Long Nasdaq-100 Index ETF also entered the top ten in the current month's popular U.S. stocks ranking.

The analysis indicates that while South Korean retail investors have moved their investment base from Seoul to Wall Street, their investment style has not significantly shifted to a defensive stance. On the contrary, from the leveraged ETFs and semiconductor-related stocks occupying the popular trading list, AI remains the primary focus of capital betting.

Rayliant Global Advisors' Research Director Phillip Wool stated that if further breaking down South Korean investors' U.S. stock buying, it can be found that the funds are mostly concentrated in AI hardware-related stocks, which are precisely the industries that have recently experienced significant corrections in the South Korean stock market.

Fibonacci Asset Management founder Jung In Yun believes that some investors who had invested in South Korean semiconductor stocks or leveraged ETFs and suffered losses in the market downturn may have started looking for what they consider higher-quality, more liquid U.S. AI stocks.

In other words, this capital shift does not necessarily mean that South Korean investors are reducing their AI exposure. Instead, it is more likely that they are transferring the same market view from the South Korean market to the U.S. market.

South Korean retail investors shift to U.S. stocks. Systematic risk is temporarily limited

Regarding whether this inflow of South Korean capital is sufficient to have a significant impact on the U.S. market, market analysts are relatively conservative.

Wool pointed out that retail investors have a relatively significant market influence in the South Korean stock market, but the trading structure of the U.S. market is still dominated by professional institutions.

Even if South Korean investors have recently significantly increased their U.S. stock buying, compared to the overall trading volume of the U.S. market, the scale is still relatively limited, so it is unlikely to form a systemic shock.

However, Lamont is more concerned about the possible price distortions that may occur in specific stocks.

He pointed out that South Korean investors had previously also concentrated on chasing U.S. quantum computing concept stocks at the end of 2024. Now, leveraged ETFs are simultaneously attracting the attention of investors from South Korea, Hong Kong, and the U.S. Such trading may further amplify the volatility of individual markets and individual stocks.

Therefore, what really needs to be focused on is not whether South Korean capital can shake the overall U.S. stock market, but whether the large amount of capital chasing the same AI themes and leveraged tools will cause some popular assets to have more obvious price deviations.

The analysis points out that the acceleration of South Korean retail investors shifting to U.S. stocks is also related to the recent sharp correction in the domestic market.

The previous strong market trend attracted a large number of retail investors into semiconductor stocks and leveraged products. However, after the Korean stocks quickly adjusted, the investors' holdings and margin positions were also simultaneously compressed.

Data from the Korea Financial Investment Association shows that the margin balance of Korean stocks was approximately 37 trillion Korean won (approximately $26 billion) at the end of June, which then fell to approximately 27 trillion Korean won at the beginning of this month, setting a new low for the year.

Lamont stated that the scale of $4.5 billion that South Korean investors bought U.S. stocks in July is not unprecedented in itself, but it is noteworthy that while the South Korean stock market experienced a sharp decline, investors increased their U.S. stock buying power.