[New York = E-Daily Seong Joowon Correspondent] The South Korean stock market has emerged as one of the most volatile markets in the world. On the 31st (local time), Bloomberg pointed out that the volatility of the KOSPI index has exceeded 60%, reaching nearly double that of Japan’s Nikkei 225 index and even surpassing Bitcoin, which is often called the “epitome of volatility.”

In the wake of the sharp surge in volatility, the Korea Exchange (KRX) triggered “circuit breakers”—temporary trading halts—nine times from the start of this year through the end of July. This stands in stark contrast to last year, when there were none, and 2024, when there was only one. Following a particularly severe market plunge at the end of July, the government and the Bank of Korea have pledged measures to stabilize the market.

SamsungElectronics and SK hynix are now the KOSPI’s

... Bloomberg identified the overwhelming weight of these two stocks— SamsungElectronics(005930)and SK hynix(000660) —as the primary cause. Both companies supply memory semiconductors essential for next-generation artificial intelligence (AI) systems and are seeing explosive growth in earnings. As their stock prices soared on the back of the AI rally, their combined weight in the KOSPI surpassed 50 percent, and this figure increases even further when affiliates are included.
As a result, Bloomberg notes that KOSPI-tracking funds have effectively become “AI-focused” products. In fact, even when the KOSPI hit an all-time high in late June, more than 650 of the index’s 831 constituent stocks actually declined.
The problem is that the AI industry has yet to generate returns commensurate with the investments made. As a result, the stock prices of related companies are extremely sensitive to shifts in investor sentiment. In fact, as concerns over “excessive data center investment” by U.S. Big Tech companies like Meta coincided with disappointing earnings, SK hynix’s stock price saw 27% of its market capitalization evaporate in just three days at the end of July, only to subsequently surge by the daily limit of 30%, driving the KOSPI up by a record 18%. This structure means that fluctuations in just a few stocks can shake the entire index.

Leveraged ETFs Attracting Even ‘Retail Investors’

The second factor is the rapid growth of

leveraged

exchange-traded funds (ETFs). These products, which typically amplify the daily return of an underlying index or asset by two times using derivatives and debt, are generally reserved for professional investors in most countries; however, in South Korea, retail investors are actively purchasing them using their savings.
South Korea’s leveraged ETF market began in 2010 with Samsung Asset Management’s “KODEX Leverage” (which tracks the KOSPI 200 at twice the rate), considered Asia’s first such product. Although financial authorities were aware of the risks—so much so that they attempted to curb investment demand for overseas leveraged ETFs last year—they have approved more than a dozen new leveraged products tracking SamsungElectronics and SK hynix this year. Retail investors currently hold 90% of these funds.
These ETFs and the two semiconductor stocks they track once accounted for more than 70% of the daily trading volume in a market worth $3.4 trillion (approximately 4,890.9 trillion won), amplifying stock price fluctuations. Following the sharp market decline in late July, Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-chul acknowledged that more thorough review was needed prior to the launch of these products, and the government announced regulatory measures, including setting exposure limits within retail investors’ portfolios and raising transaction costs.

Retail Investors “Going All In,” Foreign Investors Pulling Out

The third factor is the concentration of investment among retail investors. Domestic retail investors have poured more than 110 trillion won ($77 billion) into the KOSPI this year, helping to lower the cost of capital for companies, but at the same time, they have increased market volatility. On the other hand, foreign fund managers, concerned about excessive portfolio exposure, have made net sales of approximately $115 billion this year, with more than $40 billion of that coming from SK hynix alone.
Bloomberg noted that the herd-like trading behavior characteristic of Korean retail investors—known as “ants”—also fuels volatility. The pattern is such that panic selling follows when stock prices fall, while chase buying driven by the fear of missing out follows when prices rise. In contrast, Bloomberg explained that institutional investors tend to respond with relative calm.
According to Goldman Sachs, assets in South Korean leveraged ETFs—which track indices and individual stocks—surged from $5 billion at the start of the year to over $40 billion by the end of June. However, JPMorgan Chase stated in a report on the 29th that “the liquidation of leveraged ETFs has been completed, and hedge fund deleveraging appears to be about 90% complete.”
As long as expectations for an AI semiconductor supercycle persist, the concentration of investment in SamsungElectronics and SK hynix, along with increased volatility driven by leveraged ETFs, are likely to remain defining characteristics of the KOSPI for the time being. Whether the government’s regulations on leveraged products prove effective and whether deleveraging has truly entered its final stages are expected to be key factors in determining the stability of the stock market going forward.