Is the shoe of deleveraging in Korean stocks really about to drop this time?

This Monday, the Democratic Party's special committee initiated a review of single-stock leveraged ETFs, with cross-party lawmakers calling for their delisting. A day later, KOSPI triggered a circuit breaker.

The fuse was lit two weeks ago. On June 22, Financial Supervisory Service Governor Lee Bok-hyun publicly stated at a press conference that he regretted approving these leveraged ETFs linked to Samsung and SK Hynix. Two weeks passed from the regulator's personal regret to the political purge at the legislative level.

Korean stock market deleveraging has since entered a new phase: from the spontaneous market stampede in June to a joint bomb disposal by regulators and lawmakers. On Tuesday, KOSPI plunged to a circuit breaker during trading, closing down 4.9% at 7,656. The question now is: how far will the disposal effort go?

28 trillion won in ETFs plus 38 trillion won in margin loans, all tied to two stocks

Retail investors were the dominant force in Korea's bull run, using two main types of leverage: margin loans borrowed from brokers, and single-stock leveraged ETFs that were approved late last year and only listed on May 27 this year.

The latter is a new bomb. The 2x daily return leveraged ETFs tracking Samsung and SK Hynix saw their asset size surge to 1.07 trillion won on the listing day, the largest in Korean history; by June 1, the two products combined had attracted nearly 28 trillion won, with 93k retail investors piling in. As for margin loans—they hit a record high of 38.48 trillion won on June 23. Combined, the leverage exposure of Korean retail investors in the stock market had reached about 60 trillion won, or $40 billion, by the end of May.

Worse still, almost all this leverage was concentrated in one place. As of June 24, Samsung Electronics and SK Hynix together accounted for 55.3% of KOSPI's total market cap—up from 36.1% at the end of last year—and 63.5% of total trading volume. The deleveraging knife cuts at the two pillars holding up the entire index—cutting leverage means cutting the index.

The quality of this rally also cannot withstand scrutiny. KOSPI surged as much as 100% this year, almost matching the Nasdaq 100's gains during the 1999 dot-com bubble, but it was almost entirely driven by retail momentum, with foreign investors selling on the sidelines. A new high built on leveraged funds, highly concentrated in just two stocks, is hollow underneath.

Leveraged ETFs are time bombs

Single-stock leveraged ETFs are more dangerous than regular margin loans, rooted in their mechanism. They track the "daily" double return of the underlying, rebalancing at the end of each trading day: amplifying returns when the market rises, forcing sales at low prices and purchases at high prices when it falls. The greater the volatility, the more severe the long-term holding decay—this is volatility decay. To retail investors, it's a shortcut to "double your gains if you're bullish on Samsung," but in a volatile market, it's a product that quietly bleeds.

It concentrates retail positions precisely on the two highest-weighted stocks in the entire market. 28 trillion won of leveraged funds flow in and out twice daily following the ups and downs of Samsung and SK Hynix, effectively adding a self-reinforcing accelerator to these already crowded stocks. It fuels the rise and intensifies the fall, and now the Korean market is on the falling side.

This round is different from June: policy is a confirmed new selling pressure

The -17% drop in June was market-driven. At the time, foreign capital was continuously flowing out, retail margin positions triggered margin calls as the market fell, brokers mechanically liquidated positions at the next day's opening auction, and the price drop triggered more margin calls, creating a chain reaction that fed on itself. In that wave, regulators were bystanders.

This time, regulators are stepping in directly. Delisting, lowering leverage multiples, strengthening suitability requirements, mandating stop-losses, restricting sales—all these measures are still in the "consideration" stage, with none formally implemented. But the signal is clear enough: even the governor publicly admitted fault, cross-party lawmakers are calling for delisting, and the Bank of Korea sent a written warning to the National Assembly, highlighting the excessive concentration in the two stocks and calling for stricter regulation.

This adds a selling pressure to the market that didn't exist in June: a confirmed, mechanical, and highly concentrated forced sell-off in Samsung and SK Hynix. If leveraged ETFs are required to delist or reduce leverage, holders must exit within a limited time, selling precisely these two heavyweight stocks; lowering leverage multiples directly weakens the buying power that supports them. If policies don't materialize, fine. But if they do, they will impose another confirmed seller on an already declining market.

Why won't it be a repeat of the -17% drop in June

The most crowded leverage positions have actually already fallen first. Shinhan Securities' Noh Dong-gil's assessment is straightforward: New margin loans are mainly concentrated in the KOSPI 8,200 to 8,400 range. On Monday, the index fluctuated over 500 points intraday, barely holding 8,000. On Tuesday, it directly hit a circuit breaker, closing at 7,656—a large number of margin positions are deeply underwater. Retail investors typically start cutting losses when they are down 15%, and the risk of margin calls spikes near a 20% drawdown—margin call pressure is released gradually, not suddenly triggered from highs. This is completely different from the June wave. A portion of the leverage in the pool was already released during the June drop.

There is also a buffer on the policy side: Delisting is more likely to come with orderly arrangements like exit windows and suitability thresholds, rather than a blanket ban. The Korean government has political incentives to prevent the market from spiraling out of control—the Value-Up program was just launched, and no one wants to pop the bubble on their watch.

Further down, Samsung and SK Hynix are still supported by real HBM earnings. AI memory demand and profits are real; this fundamental floor holds up speculative positions, unlike a pure thematic bubble collapse.

However, on Tuesday, Samsung Electronics released its Q2 earnings preview, adding a crack to this floor: operating profit of 89.4 trillion won, up a whopping 1,810% year-over-year, a record high; but revenue of 171 trillion won missed market expectations, and the stock fell 7% that day. When profits hit a ceiling yet the stock falls—the market is starting to price in peak demand, and the HBM narrative is no longer monolithic.

How much longer can the decline last: 2 to 4 weeks, 8% to 12%, the watershed is July 10

On Tuesday, KOSPI was knocked to a circuit breaker intraday—from 8,051 on Monday to around 7,400, already testing the upper end of the 8% to 12% downside range. Closing back at 7,656 suggests that there was buying after the circuit breaker.

But if the cleanup is confirmed to be implemented, it could still fall another leg over the next 2 to 4 weeks, targeting the 7,100 to 7,400 area—which is precisely the starting point of the May margin rally and the cost concentration zone for leveraged positions. The decline may be faster than the June wave, driven by mechanical selling pressure; but the most crowded leverage has already fallen first, and policy is more likely to be an orderly exit, so the total magnitude has a floor.

The watershed falls on July 10. On that day, SK Hynix lists on Nasdaq, with a fundraising cap of $29.4 billion, the largest foreign company to list in the US.

Its impact has two directions: first, it brings global incremental capital to Korean semiconductors, supporting valuations; second, a weak IPO pricing could instead provide a downward anchor for already high memory valuations, while also diverting attention from the Korean market. Strong pricing gives Korean stocks a breather; weak pricing makes the second shoe drop harder.

Asset impact: Samsung and Hynix move first, then the entire KOSPI

The first to react will certainly be Samsung Electronics and SK Hynix themselves. They are the underlying assets tracked by leveraged ETFs and the most directly affected by any delisting or leverage reduction. Any policy rumor will hit these two first and hardest.

Moving up the chain is the entire KOSPI. These two stocks account for 55% of market cap; if they fall, it's almost impossible for the index to hedge with other stocks. Further out is the Korean won exchange rate; deleveraging is accompanied by capital outflows, putting pressure on KRW. There are also Korean brokerage stocks; if margin loans go bad on a large scale, their balance sheets will hurt first. The margin lending businesses of brokerages like Samsung Securities and Mirae Asset are the most easily overlooked dark lines in this deleveraging.

A-share and Hong Kong semiconductor stocks are at the tail end of the transmission chain. In the past, when Korean semiconductor stocks fell, A-share fiber optics, PCB, and memory chain stocks followed with a mirrored decline. Currently, A-share tech is undergoing sharp internal divergence—GPU, liquid cooling, and switches are rising, while PCB and fiber optics are falling—overseas mapping is fading. This round of Korean stock deleveraging will have a weaker transmission effect on A-shares than in the first half, more of a stock-specific logic than a sector-wide decline.

What scenarios would break through the 8% to 12% range

The 8% to 12% judgment is not set in stone. Two things would break it through—neither alone is enough; they must happen simultaneously: SK Hynix's IPO pricing on July 10 is clearly weak, providing a downward revaluation anchor for memory valuations; and global tech stocks simultaneously enter risk-off mode, causing foreign capital to flee Korea more aggressively. Only the combination of both would give KOSPI a reason to break below 7,000.

The government also does not want the market to get out of control. The Value-Up program was just launched, and providing exit windows and suitability thresholds is more politically logical; the probability of a blanket ban is low to begin with. This forms the lower bound of the decline. But once a delisting or leverage reduction order is formally implemented, sellers will accelerate; conversely, a gentle exit by policy would moderate or even halt the decline.

What to watch next

The final pricing and subscription multiple of SK Hynix's IPO on July 10—the short-term hardest watershed. The conclusion of the Democratic Party's review, and whether the Financial Services Commission actually issues delisting or leverage reduction orders for leveraged ETFs. Weekly margin loan data to see if the 38.48 trillion won peak has actually decreased. Samsung and SK Hynix's daily trading volume share—concentration must fall back from 63.5% to be safe. Margin call ratio—whether 9.1% is the peak for this round. Foreign capital flows—whether continuous net selling narrows.

The most violent part of this Korean stock deleveraging has already been completed by the market itself—Tuesday's circuit breaker is proof. What remains is whether regulators will push further. If they push, it's a controllable decline of 8% to 12% over 2 to 4 weeks; if they don't or push gently, the decline may stop around 7,656. Only two variables remain: the July 10 watershed, and how aggressive the regulators will be.

Risk Disclosure and Disclaimer

        Market risk exists, and investment must be cautious. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investments made based on this content are at your own risk.