Abnormally concentrated in South Korea’s stock market: two chip-stock leveraged ETFs dominate seven trading sessions in a row

Samsung Electronics and SK Hynix, two chip stocks, along with leveraged ETF products tracking them, now collectively account for more than 70% of the trading volume in the Korean stock market. This highly concentrated structure is pushing the world’s best-performing market into violent turmoil.

According to a Bloomberg report on Thursday, after the above leveraged ETFs were listed in late May, market volatility surged sharply. The Korea Composite Stock Price Index fell 5.4% on Wednesday and was down 20% from its June high, officially entering a technical bear market. This year alone, the market has triggered six nationwide trading halt mechanisms, and only this year already accounts for half of all such historical occurrences since 2000. South Korea’s top financial regulator has also recently publicly expressed regret, acknowledging that the related products have brought negative side effects.

This leveraged bet driven by retail investors was originally intended to amplify gains by riding the chip stocks’ epic rally—at their peak this year, both stocks were up more than two times compared with the start of the year. However, as doubts about heavy AI capital spending intensify, chip stocks swing violently with every development in the supply chain, and the amplitude of leveraged products is magnified many times over, causing the bets to rapidly backfire.

Extreme Concentration Reaches Record Levels, Regulatory Pressure Soars

According to data from the Korea unit of Lyon Securities, on the day before the leveraged ETFs were listed (May 26), the trading value of Samsung and SK Hynix already accounted for 31% of the entire Korean market. After adding ETF trading volume, that proportion rose to as high as 84% in late June, and still stood at 73% on Tuesday this week, highlighting the continued worsening of concentration.

This abnormal phenomenon has drawn criticism of regulators from outside observers. Opposition party lawmakers have publicly called for the forced delisting of the related products. The original intent behind the leveraged ETFs was to channel more retail funds back to the domestic market while curbing further weakness in the South Korean won, but their actual effects have run counter to policy objectives.

In fact, even before single-stock ETFs were approved, many investors and analysts had already warned that the Korean market’s heavy reliance on these two chip stocks would face severe risks if cracks appeared in the AI boom. Samsung and SK Hynix together account for 54% of the weight in the Kospi benchmark index.

Leveraging Mechanisms Self-Reinforce, Volatility Spiral Is Hard to Contain

Ian Samson, portfolio manager at Fidelity International, said that the operating mechanism of leveraged ETFs itself will exacerbate market volatility: “To maintain a constant leverage ratio, when the stock price rises, you must buy more of the underlying stocks; when the stock price falls, you must sell more. The participation of retail investors and the introduction of new leveraged products only add further on top of the volatility already driven by the enormous fundamental uncertainty in Korea’s semiconductor industry.”

This kind of mechanical feedback loop makes unusual daily swings of more than 5% increasingly common. On Tuesday of this week, the Kospi briefly plunged by more than 8% intraday, triggering the nationwide circuit breaker mechanism for the sixth time this year.

Jongmin Shim, a Korea analyst at CLSA Securities, said that the high concentration in the two chip stocks and their leveraged products “often exacerbates short-term price volatility and, in recent weeks, has weighed on broader market breadth and sentiment.” However, he also noted: “I tend to interpret the current adjustment in the context of a bull market, rather than seeing it as the beginning of a systemic downward move.”

At present, the Kospi has already retreated 20% from its June peak and has officially fallen into the technical bear market range. Whether the market can rebuild confidence amid the continued uncertainty in the fundamentals of chip stocks remains to be seen.

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