Korea's nationwide stock craze triggers "leveraged ETF crisis": foreign media report hedging costs surge 3 times, could become the culprit of global stock market turmoil.

The rise of AI investing has sparked a “everyone invests in stocks” phenomenon in South Korea, with leveraged ETF products especially popular, but it 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, it is gradually becoming the “culprit” dragging down global technology stocks.

SK Hynix and Samsung Move, Shaking Up Korean Stocks

According to Bloomberg, last week’s sharp 10% plunge in South Korea’s Kospi index—triggering a tech-stock selloff that rapidly spread around the world—was enough to show that South Korea is emerging as 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 selloff that day drove the Nasdaq index down 3%, while also highlighting another issue: the emergence of a leveraged ETF linked to SK Hynix. The report quotes analysts as saying that the sheer size and rapid growth of this ETF have amplified volatility in both SK Hynix’s stock price and the entire Korean KOSPI index.

In the nine months since the CSOP SK Hynix Leveraged ETF (07709) was launched in Hong Kong, the fund’s size has swelled to $13 billion, making it the largest among similar funds—surpassing even the Tracker Fund of Hong Kong (02800) that tracks the Hang Seng Index.

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

Two Stocks Account for Nearly 60% of Equity Weight in Korea, An Indicator Measuring AI Bubble Risk

▲ SK Hynix has a 28% weighting in South Korea’s Kospi index, while its competitor Samsung holds 29% (the two stocks together make up nearly 60% of the equity weight in the Korean market), and they are increasingly becoming a barometer for gauging global AI bubble risk.

This relentless cycle of chasing gains and cutting losses is extremely strong. Investors have even said that the ETF has started to drive the movement of the stock, rather than merely tracking it. As investors scramble to bet on the AI boom, this phenomenon is occurring more and more frequently worldwide, pushing leveraged ETFs to become a massive $270 billion behemoth. And as this new financial “alchemy” stirs up waves in the market, Seoul is bearing the brunt first. SK Hynix has a 28% weighting in South Korea’s KOSPI index, while its competitor Samsung holds 29% (the two stocks together make up nearly 60% of the equity weight in the Korean market), and they are increasingly becoming a barometer for gauging global AI bubble risk.

In other words, if the CSOP SK Hynix ETF falls again as sharply as it did on June 23—down 23%—and if the downturn continues 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 SK Hynix will drag down the S&P 500, but it is indeed part of a larger trend.” He said that the decline in SK Hynix and the Kospi index could trigger “a very rapid wave of selling.”

Tracking a Single-Stock Leveraged Product: Its Size Far Exceeds the Underlying Stock’s Average Daily Trading Volume

The CSOP ETF’s assets are about $13 billion. Its current value is roughly equivalent to twice the daily trading value of SK Hynix stock. Among leveraged ETFs tracking large stocks, this ratio is arguably the most extreme. That has changed how professionals trade the stock.

As can be seen from the table above, the scale of the single-stock L&I products (leveraged inverse products) for SK Hynix and Samsung far exceeds the underlying stocks’ average daily turnover—by 3 to 4 times. Meanwhile, the other three stocks show the opposite: normal performance. This reflects that the former is in an unhealthy situation, with liquidity overly concentrated, and it also leaves behind potential risks.

Leveraged ETF Growth Expands: Hedging Costs Soar by 3 Times

CSOP Asset Management Co., Ltd. lists more than 20 counterparties for the ETF, including Goldman Sachs, Morgan Stanley, and other major firms on Wall Street. This has formed a tangled, complex chain of trades—one that is increasingly highlighted for a company controlling nearly two-thirds of the global high-bandwidth memory chip market.

As the ETF product’s size has expanded, the banks behind it—providing the swaps—have started to impose tighter constraints on financing. Bloomberg quoted insiders as saying that some banks are currently reducing the size of the exposure they are willing to provide for products related to SK Hynix, raising fees for clients, and that some banks have suggested asset management firms 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 “cliquets”—the derivatives that banks buy to hedge against a sharp drop in SK Hynix’s share price—has risen from about 3% in March to more than 10%. CSOP has also repeatedly warned investors that if counterparties reach risk limits, new ETF unit issuance may be temporarily suspended. None of this can be said to prove that the system is failing, but it does indeed show that the cost of supporting the world’s largest single-stock leveraged ETF is becoming increasingly steep.

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