[New York = E-Daily Seong Joowon Correspondent] Wall Street has analyzed the leveraged exchange-traded fund (ETF) crisis that recently rocked South Korea’s KOSPI market as a prime example of market risk stemming from the artificial intelligence (AI) rally. Bloomberg noted that this incident is in the same vein as the 2018 collapse of volatility index (VIX)-linked products and the 2024 sharp stock price fluctuations triggered by Strategy (formerly MicroStrategy) leveraged ETFs.

According to Bloomberg on the 11th (local time), South Korean financial authorities initially approved the launch of about 10 leveraged ETFs tracking the SamsungElectronics(005930) andSK hynix(000660)earlier this year. However, in June, as concentration in these products and their two underlying assets grew to the point where their trading volume accounted for 70% of the Seoul stock market’s daily trading, the authorities belatedly raised margin requirements and temporarily suspended new listings. At the time, South Korea’s volatility index soared to a record high of 96.9, and the 20-minute trading halt—triggered by an 8% plunge—was activated an unprecedented four times.
Wall Street is focusing on the structural risks of leveraged ETFs. These products must rebalance their target multiples (2x, 3x, etc.) on a daily basis; they must increase exposure when stock prices rise and reduce it when they fall—and even inverse (short) products have the paradoxical structure of requiring purchases following a rally. Since this rebalancing is based on the closing price, a surge of selling pressure tends to occur right at the end of the trading day. Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, explained, “In the options market, this is called ‘short gamma,’ and the key point is that large volatility breeds more large volatility.”
Nomura estimated that last June, when KOSPI volatility peaked, the entire leveraged ETF industry had to buy and sell $10 billion (approximately 14.13 trillion won) worth of assets for rebalancing every time the underlying asset moved by 1%. Nikolaos Panigirtzoglou, a strategist at JPMorgan, predicted, “As leveraged ETF assets have grown relative to the market capitalization of the underlying assets, exceptionally large rebalancing volumes have emerged, and this has overwhelmed other supply and demand factors, amplifying market volatility.” He added, “Given the heavy concentration in AI stocks, this will continue to be a source of large rebalancing volumes and increased volatility in tech stocks.”
Bloomberg noted that while global leveraged ETF assets total approximately $250 billion—a negligible amount compared to the overall ETF market of over $22 trillion—they exert a presence far exceeding their share in terms of daily trading volume. Trading volume tripled from its low in January to its peak in June, reaching a 30-day average of approximately $70 billion. In particular, an analysis of about 800 bullish (long) leveraged ETFs revealed that funds were concentrated on a small number of AI stocks, specifically products linked to four memory semiconductor companies. CSOP’s SK hynix leveraged ETF in Hong Kong briefly became the world’s largest single-stock leveraged ETF with $17 billion in assets, but as its size grew disproportionately large relative to daily trading volume, critics even noted that it “moves the stock price rather than tracking it.”
Experts’ views are divided. Peter Cheer, Head of Macro Strategy at Academy Securities, cited the 2018 collapse of VIX-linked products, stating, “This is how VIX ETFs blew up. The mechanical rebalancing process was risky,” and added, “While these products aren’t as bad as they were back then, they’re still cause for concern.” RBC’s Silverman warned, “There are elements reminiscent of the meme stock craze,” noting that even investors not directly involved with leveraged ETFs are not immune to its impact. In contrast, Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, said, “These are relatively well-understood risks embedded in transparent and liquid products,” adding that he is not particularly concerned compared to other market risks.
This incident also highlighted differences in the speed of regulatory responses. The U.S. effectively limits the leverage ratio of new leveraged ETFs to a maximum of 2x, and regulators have recently been putting the brakes on attempts to launch new products with leverage ratios of 3x or higher. In contrast, South Korea approved the launch of about 10 products all at once early this year and only took retroactive measures—such as raising margin requirements and imposing listing restrictions—after the market began to waver.
As Bloomberg’s analysis suggests, this KOSPI incident may not be a one-off event but rather a preview of structural risks. This means we cannot rule out the possibility that similar market concentration could reoccur if the AI rally resumes. Unlike the U.S., which regulates leverage ratios proactively, South Korea has relied solely on ex post measures such as raising margin requirements and restricting listings. Consequently, whether this crisis will lead to a permanent tightening of regulations on domestic leveraged products is seen as the next key variable.