South Korean President Acknowledges Stock Market Instability as Leveraged ETF Issue Becomes Politicized
Taylor Wilson
President Lee Jae-myung publicly called South Korea's stock market "quite unstable" and ordered regulators to address leveraged ETFs — a signal that what was a market-structure issue has now become a political one, making tighter rules all but certain.
Why did the president step in now?
The Kospi index fell a cumulative 20% from its peak this month, entering a technical bear market; despite a 7.6% bounce on Wednesday, it is still up more than 70% year-to-date.
Lee attributed the volatility to markets digesting a rally he called "historically unprecedented in scale," saying time and turbulence are needed to absorb it.
This means → the government is no longer treating the sell-off as a normal pullback; it is acknowledging structural risk — the first time the Lee administration has done so at the highest level.
Why is the Kospi so sensitive to single-stock moves?
SK Hynix and Samsung Electronics together account for more than 50% of the Kospi's weighting, making the index heavily dependent on two chipmakers.
In plain terms = more than half the Korean benchmark's direction is decided by two chip stocks; when they drop, the whole index follows.
That concentration, layered with leveraged products, amplifies individual-stock swings across the entire market.
How exactly do leveraged ETFs amplify volatility?
Single-stock leveraged ETFs tracking SK Hynix and Samsung — funds designed to deliver twice the daily return of the underlying share — are the core amplifier of this sell-off. Combined AUM exceeds $14 billion; prices have fallen roughly 40% since their Seoul listings in May.
A Goldman Sachs internal memo showed that a double-digit single-day drop in SK Hynix could force related leveraged funds to sell about $5 billion in holdings to rebalance — roughly 18% of that day's combined turnover in SK Hynix shares and index futures.
This means → leveraged ETFs do not just track the decline; their daily rebalancing mechanism creates additional selling pressure — the steeper the fall, the more they must sell, forming a self-reinforcing downward spiral.
Can this risk spread across borders?
SK Hynix ADRs now trade in the U.S. Korean margin-loan balances peaked above ₩38 trillion in June; a wave of margin calls could trigger cascading forced sales.
Analysts warn that selling in New York could set off leveraged-ETF rebalancing and margin calls in Seoul, which then feeds volatility back into the U.S. session.
In plain terms = New York falls → Seoul leveraged ETFs are forced to sell → Seoul falls harder → New York falls again — a near-24-hour cross-market feedback loop.
Why is the opposition attacking now?
The opposition People Power Party on Tuesday formally accused the Lee government of chasing ambitious market targets while ignoring the buildup of leverage risk.
Floor leader Chung Jum-sik said officials had dismissed repeated warnings about leverage accumulating beneath the surface rally: "Just watching the Kospi makes you dizzy."
This reflects a deeper shift: leveraged ETFs are no longer just a market-risk issue — they have become political ammunition, and Lee's flagship goal of closing the "Korea discount" now faces a credibility challenge.
What can regulators actually do?
Markets expect measures including higher minimum margin requirements for leveraged ETFs, a possible cut in the leverage cap from 2× to 1.5×, and investor-education initiatives.
Jon Withaar, portfolio manager at Pictet Asset Management, noted that the steps Korean regulators can take without disrupting market structure are limited — and leveraged ETFs listed in Hong Kong and the U.S. are outside their jurisdiction.
This means → the key variable for whether this sell-off has bottomed is not whether regulators act, but whether the leveraged structure can deleverage on its own before tighter rules arrive.
Content is for reference only, not financial advice.