South Korea's nationwide stock craze triggers "leveraged ETF crisis": foreign media says hedging costs surge threefold, could become the culprit of global stock market turmoil.

The rise of AI investing trends has sparked a “everyone investing in stocks” scene in South Korea—especially with leveraged ETF products being the most popular. But this has also given rise to a “leveraged ETF crisis” (meaning that when the stock market falls, these ETFs drop twice as much as the underlying stocks). At the same time, they have gradually become a “culprit” dragging down global technology stocks.

SK Hynix and Samsung sway Korean stocks

According to Bloomberg, last week’s sudden 10% plunge in South Korea’s Kospi index—and the technology-stock selloff that quickly spread globally—was enough to show that South Korea is becoming a new force in global markets. It also reflects the key role played by South Korean chipmakers SK Hynix and Samsung Electronics in the AI boom.

The frenzied selling that day sent the Nasdaq down 3%, while also highlighting another issue: the appearance of a leveraged ETF tied to SK Hynix. Citing analysts, the report said that the ETF’s massive size and rapid growth have magnified volatility in SK Hynix’s share price and the entire KOSPI index.

Since the CSOP SK Hynix Leveraged ETF (07709) was launched in Hong Kong nine months ago, the fund’s scale has ballooned to $13 billion, making it the largest among comparable funds—surpassing even the Tracker Fund of Hong Kong (02800), which tracks the Hang Seng Index.

Meanwhile, SK Hynix has helped drive South Korea’s KOSPI index up nearly 100% this year. On days of intense market volatility, the trading volume of this ETF and its smaller peer funds can account for two-thirds of SK Hynix’s total share trading volume. For a company with a market capitalization of $1.2 trillion, that is an astonishing figure—and it has forced major banks from Wall Street to Hong Kong to build a complex web of financing and hedging trades to keep these products running normally.

Two stocks make up nearly 60% of equity weighting in Korean stocks—indicators for measuring AI bubble risk

▲ SK Hynix’s weight in the Korean Kospi index is 28%, while its rival Samsung accounts for 29% (the two stocks together account for nearly 60% of the weight of Korean stocks). The two increasingly serve as a gauge for global AI bubble risk.

This relentless cycle of chasing gains and cutting losses is particularly strong. Investors have even said that this ETF has started to influence the stock’s price action—not merely track it. As investors rush to bet on the AI boom, this phenomenon is appearing more and more frequently worldwide, and is pushing leveraged ETFs to become a massive $270 billion behemoth. As this new form of financial “alchemy” stirs up turmoil in the market, Seoul is hit first: SK Hynix’s weight in the Korean KOSPI index reaches 28%, with Samsung at 29% (the two stocks together account for nearly 60% of the weight of Korean stocks), and they are increasingly becoming a barometer for global AI bubble risk.

In other words, if the CSOP SK Hynix ETF were to plunge again by 23% the way it did on June 23, and if the selloff continued long enough, it could bring even greater suffering 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 bigger trend.” He said that the decline in SK Hynix and the KOSPI could trigger “a wave of selloffs that happens very quickly.”

The size of leveraged products tracking a single stock far exceeds the underlying stock’s daily average trading volume

The CSOP ETF’s asset size is about $13 billion, which is currently roughly twice the value of SK Hynix stock’s single-day trading amount. Among leveraged ETFs that track large-cap stocks, this ratio is arguably the most extreme. This has changed how professionals trade the stock.

From the table above, the scale of SK Hynix and Samsung’s single-stock L&I products (leveraged inverse products) is far larger than the underlying stocks’ average daily trading volume—by 3 to 4 times. Meanwhile, the other three stocks perform in the opposite way—showing normal results as expected. This indicates that the former has an unhealthy situation: liquidity becomes overly concentrated, and potential risks are also planted.

Leveraged ETF scale expands—hedging costs surge by 3 times

CSOP Asset Management Co. lists more than 20 ETF counterparties, including Goldman Sachs, Morgan Stanley, and other major firms on Wall Street. This forms a tangled chain of trading—and for a company that controls nearly two-thirds of the global high-bandwidth memory chip market, the growing importance of its stock price is becoming even more prominent.

As the ETF product’s scale grows, the banks behind the swaps begin to tighten constraints on financing. Bloomberg, citing people familiar with the matter, said some banks are now reducing the size of exposure they are willing to offer for SK Hynix-related products and raising fees for clients, while other banks have suggested that asset management companies directly hold SK Hynix shares and then sign swap agreements with banks.

The cost of managing this risk is also rising. According to prices Bloomberg has seen, the annualized cost of derivatives—“cliquets”—that banks buy to hedge against a collapse in SK Hynix’s share price has risen from about 3% in March to over 10%. CSOP has also repeatedly warned investors that if counterparties reach risk limits, the issuance of new ETF units may be suspended. None of this can be said to prove that the system is failing—but it does clearly show that the cost of supporting the world’s largest single-stock leveraged ETF is becoming increasingly high.

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