Leverage-ETF Volatility Sends KOSPI Down Over 2% at the Open
The KOSPI opened Monday under heavy foreign selling, falling about 2.2% to the 7,900 level, while the KOSDAQ dropped as much as 4% to around 830 points. Foreign investors sold across the board — cash, futures, calls and puts alike — offloading roughly 1 trillion won in the cash market and another 1 trillion won in futures. Institutions were also net sellers in cash, with only pension funds providing modest support through small net buying, though it remains unclear whether that will continue. The won, which had plunged more than 30 won last Friday, rebounded somewhat on the day.
Before the market opened, the hosts pointed to single-stock leverage ETFs as the main driver behind the recent surge in volatility. The products were originally introduced to defend the currency, absorb capital that would otherwise flow overseas, and reflect a maturing investor base, but unlike Hong Kong or US leverage products that are largely derivatives-based, Korea's version trades the underlying stock and futures simultaneously — a structure that, it turns out, makes it unusually easy to rattle the domestic market itself. As a result, the industry is now discussing steps such as gradually raising account margin requirements from the current 10 million won toward as much as 100 million won, tightening investor education, or even delisting existing products. Regulators — specifically the Capital Markets Special Committee — have reportedly already begun an inquiry into leverage ETFs.
The most intuitive gauge of volatility, the hosts said, is the daily trading range — the gap between a session's high and low. The average intraday swing in May and June exceeded 4 percentage points, a level with no real precedent in Korean market history. As of this broadcast, however, there was no clear sign yet that this range was narrowing.
Guest Shin Jung-ho, head of research at LS Securities, noted that while roughly 180 trillion won a year in foreign net selling of KOSPI shares is a factor behind the won's weakness, a weak won does not automatically mean falling stocks — in the first half of 2024, for instance, the won was weak yet the index rose as foreign buying concentrated in the semiconductor value chain. He pointed to global liquidity, measured as aggregate M2 across major economies, peaking in February and declining since, combined with simultaneously hawkish stances from the Bank of Korea, the Bank of Japan and the European Central Bank, as the backdrop for the recent foreign selling.
For the second half, Shin recommended keeping cash allocation at roughly 30% during this high-volatility phase to retain the flexibility to buy on dips and sell into rallies. Of the remaining equity allocation, he suggested splitting it evenly between AI-related semiconductor and electronics value-chain names and more defensive sectors such as shipbuilding, defense and financials. He characterized July and August as a conservative, wait-and-see stretch until earnings and the Fed's policy direction become clearer, but added that once KOSDAQ's tiering and delisting reforms take full effect, cash-rich but undervalued so-called 'bad stocks' could become activist-investor targets, opening up a fresh set of opportunities.