South Korea’s retail investors nationwide sparked the “leveraged ETF crisis.” Foreign media: hedging costs surge by 3x, feared to be the culprit behind a major shock to global stock markets

The rise of AI investment has sparked a phenomenon in South Korea where "everyone is investing in stocks," with leveraged ETF products being the most popular. However, this has also led to a "leveraged ETF crisis" (i.e., when the stock market falls, these ETFs decline twice as much as the underlying stocks). At the same time, they have gradually become the "culprits" dragging down global tech stocks.

SK Hynix and Samsung Drive KOSPI Volatility

According to Bloomberg, last week's 10% plunge in South Korea's KOSPI index, which triggered a rapid spread of tech stock declines globally, highlights South Korea's emergence as a new force in global markets. This also underscores the critical role of South Korean chipmakers SK Hynix and Samsung Electronics in the AI boom.

The day's frantic selloff dragged the Nasdaq down 3%, while also highlighting another issue: the emergence of a leveraged ETF tied to SK Hynix. Bloomberg quoted analysts saying that the ETF's massive size and rapid growth have amplified volatility in SK Hynix's stock price and the broader KOSPI index.

Since the launch of the CSOP SK Hynix Leveraged ETF (07709) in Hong Kong nine months ago, its assets have ballooned to $13 billion, making it the largest among its peers, even surpassing the Tracker Fund of Hong Kong (02800), which tracks the Hang Seng Index.

At the same time, SK Hynix has helped boost the KOSPI index by nearly 100% this year. On volatile trading days, the trading volume of this ETF and its smaller counterparts can account for up to two-thirds of SK Hynix's total stock turnover—a staggering figure for a company with a market cap of $1.2 trillion. This has forced major banks from Wall Street to Hong Kong to weave a complex web of financing and hedging trades to keep these products functioning.

Two Stocks Account for Nearly 60% of KOSPI Weight, Becoming a Gauge for AI Bubble Risk

▲ SK Hynix accounts for 28% of the KOSPI index weight, while its rival Samsung accounts for 29% (the two stocks together represent nearly 60% of the KOSPI weight) and are increasingly becoming a barometer for global AI bubble risk.

This relentless cycle of buying high and selling low is so strong that investors even say the ETF has begun to dictate the stock's direction, rather than merely tracking it. As investors rush to bet on the AI boom, this phenomenon is occurring more frequently globally, propelling leveraged ETFs into a $270 billion behemoth. As this new financial "alchemy" stirs waves in the market, Seoul feels the impact first, with SK Hynix making up 28% of the KOSPI weight and its rival Samsung at 29% (the two stocks together account for nearly 60% of the KOSPI weight) and increasingly serving as a barometer for global AI bubble risk.

In other words, if the CSOP SK Hynix ETF experiences another 23% plunge like it did on June 23, and if the decline persists long enough, it could bring greater pain to the market.

Bloomberg quoted Dean Curnutt, CEO of Macro Risk Advisors, as saying, "I'm not saying SK Hynix will drag down the S&P 500, but it is indeed part of a larger trend." He stated that a decline in SK Hynix and the KOSPI could trigger "a very rapid wave of selling."

Single-Stock Leveraged Product Size Far Exceeds Underlying Stock's Daily Average Volume

The CSOP ETF has assets of approximately $13 billion, currently worth about twice the daily trading volume of SK Hynix stock, making this ratio the most extreme among leveraged ETFs tracking large-cap stocks. This has changed how professionals trade the stock.

From the table above, the size of single-stock L&I products (leveraged and inverse products) for SK Hynix and Samsung far exceeds the daily average trading volume of the underlying stocks by 3 to 4 times, while the other three stocks show the opposite, normal behavior. This reflects an unhealthy situation for the former, with excessive liquidity concentration and underlying risks.

Leveraged ETF Size Growth Drives Hedging Costs Up 3x

CSOP Asset Management lists over 20 counterparties for the ETF, including Goldman Sachs, Morgan Stanley, and other major Wall Street firms. This has created a complex trading chain, increasingly highlighting the importance of the stock price for a company that controls nearly two-thirds of the global high-bandwidth memory chip market.

As the ETF's product size has expanded, banks providing swaps behind it have begun to tighten financing constraints. Bloomberg quoted sources saying that some banks are now reducing the exposure they are willing to offer for SK Hynix-related products and raising fees for clients. Others have suggested that asset managers directly hold SK Hynix stock and then sign swap agreements with banks.

The cost of managing this risk is also rising. According to quotes seen by Bloomberg, the annualized cost of derivatives called "cliquets," which banks buy to hedge against a sharp drop in SK Hynix's stock price, has risen from around 3% in March to over 10%. CSOP has also repeatedly warned investors that new ETF unit issuances may be suspended if counterparties reach risk limits. None of this indicates that the system is failing, but it does show that the cost of supporting the world's largest single-stock leveraged ETF is becoming increasingly expensive.

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