Leveraged ETFs trigger South Korean stock market crash, commentator warns

South Korean stocks plummeted dramatically, dragging down markets in Japan and Taiwan, as a consequence of what financial commentator Hsieh Chin-ho describes as "giving hallucinogens to a speeding teenager." The sharp decline, exceeding 10% for the KOSPI index in a single day, has made the South Korean stock market a global focal point.

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Hynix, Samsung previously saw amazing gains, and when stock prices soared, they issued double-leveraged ETFs. This is like a teenager speeding and being fed hallucinogens, an accident is inevitable!

Hsieh, chairman of Fubon Financial Holdings, highlighted the role of two-times leveraged Exchange Traded Funds (ETFs) issued on stocks like Hynix and Samsung. These financial products, introduced when the stocks had already seen astonishing gains, amplified both upward and downward movements. Hynix, for instance, surged from 73,100 won to 2,987,000 won, a nearly 40-fold increase, while Samsung rose from 49,900 won to 374,500 won, a 650% jump. The daily rebalancing mechanism of these leveraged ETFs created greater volatility, causing prices to swing wildly.

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South Korean stocks have become the world's focus. Next, we need to see the South Korean stock market stabilize so everyone can breathe a sigh of relief!

The situation has led to significant financial distress for many investors, particularly younger Koreans who had become accustomed to rapid gains. Hsieh reported that 1.2 million investor accounts faced margin calls, and 350,000 investors experienced forced liquidations. Alarmingly, despite South Korea's stock market being the world's best performer from last year into this year, 76.3% of investors have lost money in 2024. The KOSPI has fallen 36.14% from its peak of 9385.87 to 5992.91, making its current decline the steepest globally after its previous top performance.

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The daily rebalancing mechanism is driving stock prices, leading to greater increases during rallies and steeper declines during downturns.

This volatility has also impacted related ETFs internationally. For example, the Hong Kong-listed Southern II Hynix fell 30.24% and Southern II Samsung dropped 26.73%. In the U.S. market, triple-leveraged ETFs like SOXL and KORU also saw significant intraday drops. Hsieh emphasized that the stability of the South Korean stock market is now crucial for global investors, who anxiously await its opening each morning.

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South Korean young people are already accustomed to making quick money. Without the double leverage, they had already gone all-in with all their assets.