South Korean Retail Investors Pour $4.5B into U.S. Stocks, Remain Bullish on AI

Even as global investors are bullish on Korean stocks, a wave of South Korean retail investors has shifted to U.S. equities to avoid domestic market downturn risks. According to data from the Korea Exchange, South Korean retail investors were net sellers of Korean stocks for most of last week, even as the market entered a bullish phase. Meanwhile, overseas investors reversed course, becoming net buyers of Korean stocks. Here's what South Korean retail investors are doing: Buying ADRs. According to data from the Korea Securities Depository, South Korean investors net bought $4.5 billion in U.S. stocks in July, with about $840 million invested in SK Hynix's American Depositary Receipts (ADR) (SKHY-US), making it the second-largest net buy for South Korean investors in U.S. securities, even though they could have bought the same company's stock directly in Korea. SK Hynix's ADR trading price is at a premium compared to Korean stocks, with Acadian Asset Management Senior Vice President Owen Lamont noting a recent premium of about 10%. Additionally, ADRs have higher volatility. Lamont commented on South Korean investors buying SK Hynix's U.S.-listed stocks, calling it 'absolutely crazy.' He pointed out that this price gap is rare and could be a sign of speculative overheating, 'a symptom of a bubble.' He also noted that similar price misalignments occurred during the dot-com bubble for Taiwanese and Indian companies. Leveraged Bets. As of August, among the top 10 most popular U.S. stocks among South Korean investors, one is a leveraged product—the ProShares Ultra QQQ ETF, ranked seventh. According to data from the Korea Securities Depository, in July, the top 10 U.S. stocks net bought by South Korean investors included four leveraged products. The most popular was the Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL-US), which aims to provide three times the daily return of the semiconductor index. Additionally, the leveraged ProShares UltraPro QQQ and ProShares Ultra QQQ were ranked fourth and sixth, respectively. Changing Markets, Not Bets. Data shows that these investors may have changed investment markets but not necessarily their original bets. Rayliant Global Advisors Research Director Phillip Wool said, 'Ironically, if you look closely at the data and see what they're buying, you'll find that most are still in AI hardware-related stocks, which is the theme that has been sold off in the Korean market recently.' Fibonacci Asset Management founder Jung In Yun noted that some traders who suffered losses in Korean semiconductor stocks or leveraged ETFs may be shifting to what they consider higher-quality or more liquid U.S. AI stocks. Yun said, 'They're not necessarily reducing their AI exposure; they're just changing the geographic investment tool to express the same view.' In other words, South Korean retail investors are not truly exiting AI trades but are moving from Korean stocks to U.S. stocks, continuing to bet on the same AI investment logic. July Reversal. According to data from the Korea Securities Depository, South Korean retail investors net bought about $4.5 billion in U.S. stocks last month, a significant increase from June and close to the $5 billion net buy in January this year. Meanwhile, the Korean stock market experienced a massive sell-off. The Korean stock market recently experienced a surprising rally, attracting retail investors to pour into semiconductor stocks and leveraged products, and saw a rebound this month. According to data from the Korea Financial Investment Association, the margin trading balance in the Korean stock market was about 370 trillion won ($260 billion) at the end of June, but has since plummeted to 27 trillion won at the beginning of this month, the lowest level of the year. Lamont noted that while the scale of South Korean retail investors buying U.S. stocks in July was 'strong,' it was not unprecedented. However, he pointed out that 'it is noteworthy that they increased their buying of U.S. stocks during the Korean stock market's decline.' Market Impact. Whether the influx of South Korean capital is large enough to cause noticeable volatility in the much larger U.S. stock market is another question. Wool believes the risk is low. He noted that retail investors in the Korean stock market may have significant influence, but the U.S. market is primarily dominated by professional and institutional investors. Therefore, even if the inflow of South Korean capital is large, it is still limited compared to the overall trading volume of U.S. stocks. Lamont, on the other hand, believes that South Korean capital is more likely to cause price distortions in individual stocks and markets preferred by retail investors. He pointed out that at the end of 2024, South Korean investors had a frenzy for U.S. 'quantum' concept stocks. Additionally, the number of leveraged ETFs in South Korea, Hong Kong, and the U.S. markets is increasing, 'which may be increasing volatility and amplifying market fluctuations.'