South Korea's All-In Stock Craze Triggers 'Leveraged ETF Crisis': Foreign Media: Hedging Costs Soar 3 Times, Could Become the Culprit of Global Stock Market Turmoil

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

SK Hynix and Samsung Drive Volatility in Korean Stocks

According to Bloomberg, last week's 10% plunge in the Kospi index, which triggered a rapid global sell-off in tech stocks, is enough to show that South Korea is becoming a new force in global markets. This also highlights the key role played by Korean chipmakers SK Hynix and Samsung Electronics in the AI boom.

The frenzied sell-off that day caused the Nasdaq to fall 3%, while also highlighting another issue: the emergence of a leveraged ETF tied to SK Hynix. The report quoted analysts as saying that the sheer size and rapid growth of this ETF have amplified the volatility of SK Hynix's stock price and the entire KOSPI index.

In the nine months since the CSOP SK Hynix Leveraged ETF (07709) was launched in Hong Kong, its assets have swelled 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.

Meanwhile, SK Hynix has helped boost the KOSPI index by nearly 100% this year. On days of extreme market volatility, the trading volume of this ETF and its smaller counterparts can account for two-thirds of the total trading volume of SK Hynix stock. For a company with a market cap of $1.2 trillion, this is a staggering figure, forcing major banks from Wall Street to Hong Kong to weave a complex network of financing and hedging trades to keep these products functioning.

Two Stocks Account for Nearly 60% of Korean Market Weight, Becoming a Barometer for AI Bubble Risk

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

This relentless cycle of chasing gains and cutting losses is very strong, with investors even saying that the ETF has begun to dictate the stock's movement rather than just tracking it. As investors rush to bet on the AI boom, this phenomenon is occurring more frequently globally, pushing leveraged ETFs into a massive $270 billion industry. As this new financial "alchemy" ripples through markets, Seoul is bearing the brunt. SK Hynix's weighting in the KOSPI is 28%, and its competitor Samsung is at 29% (the two stocks together account for nearly 60% of Korean market weight), increasingly becoming a barometer for global AI bubble risk.

In other words, if the CSOP SK Hynix ETF again plunges 23% as it did on June 23, and if the downturn persists long enough, it could bring even greater pain to the market.

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

Size of Single-Stock Leveraged Products Far Exceeds Daily Trading Volume of Underlying Stocks

The CSOP ETF has assets of about $13 billion, roughly equivalent to twice the daily trading volume of SK Hynix stock. Among leveraged ETFs tracking large-cap stocks, this ratio is one of the most extreme. It has already changed how professionals trade the stock.

From the table above, it can be seen that the size of single-stock L&I products (leveraged and inverse products) for SK Hynix and Samsung far exceeds the average daily trading volume of the underlying stocks by three to four times. In contrast, the other three stocks show the opposite, which is normal. This indicates an unhealthy situation for the former, with excessive concentration of liquidity and underlying potential risks.

Leveraged ETF Expansion Causes Hedging Costs to Triple

CSOP Asset Management Co., Ltd. lists more than 20 counterparties for this ETF, including Goldman Sachs, Morgan Stanley, and other major Wall Street firms. This creates a complex trading chain that highlights the growing importance of the stock price of a company controlling nearly two-thirds of the global high-bandwidth memory chip market.

As the ETF product has grown, banks providing the underlying swaps have begun to tighten financing. According to Bloomberg citing people familiar with the matter, some banks are now reducing the exposure they are willing to offer for products linked to SK Hynix and raising fees for clients. Others have suggested that asset managers directly hold SK Hynix stock and then enter into swap agreements with banks.

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

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