Korea's Deleveraging Shocks Global Markets as Quality Factor Takes Over from Momentum
Claire Weston
A leveraged-ETF unwind centered on Korea's chip stocks is rippling through global tech, while quality-factor strategies rose 3.8% in two months — J.P. Morgan estimates the deleveraging needs roughly three more months to run its course.
Why is Korea the epicenter of this sell-off?
Samsung Electronics and SK Hynix together account for over half of KOSPI's weighting. Retail margin financing hit a record ₩38.6 trillion, locking the entire index to two chip stocks and household leverage.
A Hong Kong-listed 2× leveraged long SK Hynix ETF ballooned more than 20-fold this year to roughly $7.78 billion — large enough to move the underlying stock price.
In plain terms = what broke in Korea first was not the AI earnings thesis itself, but the market microstructure: prices ran far ahead of profits, and the leverage scaffolding gave way.
Why does "sideways chop" itself destroy leveraged ETFs?
Leveraged ETFs suffer from path dependence — a compounding drag that works against holders in volatile markets. If an index drops 10% then rallies 11.1% back to even, a 3× product still loses roughly 7%. In plain terms = no further decline is needed; oscillation alone erodes the position.
Single-stock leveraged ETFs also rebalance daily — forced buying on up days, mechanical selling on down days — creating a self-reinforcing feedback loop. This means → gains inflate the bubble; losses accelerate the stampede.
The pressure is traveling along the chain: Korean memory chips → Asian tech → U.S. semiconductors and high-beta momentum baskets.
How far has the deleveraging actually gone?
J.P. Morgan estimates memory-chip leveraged-ETF assets have shrunk roughly 34% from the peak, and all-equity leveraged ETFs are down about 13% — but leverage ratios relative to underlying market cap have not yet normalized.
Retail small-lot call-option volume had approached a cycle extreme of nearly 14 million contracts; margin-account leverage remains near the historic highs of mid-2018 and late 2021.
This means → marginal buying power for tech is fading, yet forced-liquidation risk has not fully cleared. J.P. Morgan estimates roughly three more months of high-volatility range-trading before levels return to pre-April norms.
What does the "quant safety trade" actually buy?
The quality factor — a rules-based screen selecting companies with strong balance sheets and stable earnings — is not the same as buying utilities or low-volatility ETFs. It goes long high-quality firms and, when needed, shorts low-quality ones to extract a return independent of market direction.
Typical screens: high return on equity, steady earnings growth, low debt leverage, healthy free cash flow.
Barclays' quality-factor basket currently includes DaVita, Williams-Sonoma, Kohl's, Fastenal, Seagate, Planet Fitness, Morgan Stanley, and Moderna, among others.
Why is quality surging right now?
The 90-day correlation between quality and momentum factors has dropped to roughly −0.63 — one of the most extreme readings in Barclays' records. In plain terms = the more momentum falls, the more quality rises; they are on opposite ends of a seesaw.
Barclays data: quality strategies gained 3.8% over the past two months, the best of eight factor categories tracked. On Thursday alone the quality basket rose 1.9%, while the Nasdaq 100 fell 1.6% and U.S. semis plunged 4.3%.
Barclays' head of global equity tactical strategy Alex Altman said momentum had benefited from AI capex and accommodative policy, but "many of those tailwinds are now beginning to fade."
Does this mean the bull market is over?
Altman noted that quality-factor cycles often signal investors are moving into the later stages of an economic expansion — "but that does not necessarily mean the bull market is finished." Since 2004, quality and the S&P 500 have risen simultaneously more than 45% of the time.
Last year's institutional fixation on AI trades drove quality-factor enterprise-value-to-sales down to the 11th percentile of the past 20 years. Barclays data show that when the multiple fell this low before, it posted gains in 92% of subsequent six-month windows.
Morgan Stanley strategist Michael Wilson recommends a tactical shift: reduce leveraged ETFs, near-dated calls, and crowded AI hardware positions, and rotate toward low-leverage, high-free-cash-flow sectors with rising earnings estimates that have lagged this year — financials, industrials, healthcare, and consumer.
Content is for reference only, not financial advice.