South Korean Leveraged ETFs Face Mandatory Reduction to 1x Leverage, AUM Already Down 78%
Alina Collins
South Korea's regulator on July 29 authorized emergency cuts to 2x leveraged ETF multipliers — all the way down to 1x. Total leveraged-ETF AUM has already plunged 78% from ₩49 trillion to ₩10.7 trillion, yet share counts have barely declined, leaving tail risk unresolved.
AUM crashed 78% — did investors actually leave?
Total AUM of South Korea's single-stock leveraged ETFs fell from a June 25 peak of ≈₩49 trillion to ₩10.7 trillion by July 30 — a 78.2% drop.
Huatai Securities notes the shrinkage was driven mostly by underlying stock declines eroding NAV. Fund shares fell only modestly.
This means → most holders never actively redeemed. De-leveraging happened through losses, not exits — position risk remains intact.
What does the new rule actually do?
The July 29 measure lets regulators force-cut the fixed 2x multiplier to 1.5x or even 1x during extreme market conditions.
In plain terms = regulators previously only blocked new money from entering. Now they can reach inside existing positions — a shift from controlling inflows to digesting the stock of leverage.
The mechanism: leveraged ETFs must rebalance daily (buying into rallies, selling into drops). The notional amount traded is roughly "fund AUM × (L² − L)". Cutting L from 2 to 1 drops that rebalancing force to zero.
Has risk exposure fallen to safe levels?
As of July 30, leveraged-ETF risk exposure as a share of underlying free-float market cap fell to 0.93% — below the U.S. broad-market norm of ≈1.1%.
But Nvidia and Tesla — the U.S. names with the highest leveraged-ETF exposure — sit at only ≈0.4%. South Korea's ratio remains notably elevated.
VKOSPI (the KOSPI 200 volatility index) stands at 86.18, its 99.6th percentile since 2005 — an extreme reading.
This reflects a key driver: Huatai conservatively estimates leveraged-ETF rebalancing still accounts for 11.4% of 30-day average turnover in Samsung Electronics and SK Hynix.
Why haven't share counts dropped sharply?
The toughest measures — tighter deviation-rate thresholds, fast-halt procedures, and strict multiplier-cut requirements — have not fully taken effect.
Meanwhile, some investors front-ran the July 31 margin-deposit rule change by buying in advance, offsetting redemption pressure during the sell-off.
This means → the policy impact is still in transit. The real inflection in fund shares will only be visible once all core measures are live.
How tight is the gate on new money?
The Financial Services Commission announced on July 24: margin-deposit thresholds rise from ₩10 million to ₩30 million, and only cash counts.
Substitute securities are no longer accepted. Proceeds from selling stocks can only count as margin after T+2 settlement. The rule took effect July 31.
In plain terms = investors used to pledge stocks as margin and count same-day sale proceeds. All of that is now blocked — the entry barrier tripled, cash only.
What comes next?
Huatai Securities sees late July through mid-August as the window when policies hit simultaneously. Korean equities are expected to stay volatile, but directional pressure has clearly eased versus the earlier phase.
Foreign net selling has slowed at the margin; July 30 saw a net inflow.
After mid-August, as the policy shock fades, Korean equity performance will hinge more on semiconductor fundamentals.
Content is for reference only, not financial advice.