Leveraged ETF fiasco weighs on Lee administration's economic team

The KOSPI and Kosdaq are displayed in the dealing room of Hana Bank in Seoul, Thursday. The benchmark KOSPI closed at 5,593.56, down 1.23 percent from the previous session, while the secondary Kosdaq closed at 644.78, down 2.7 percent. Yonhap

When President Lee Jae Myung took office in June 2025, he promised to lift Korea's benchmark index to 5,000. Within a year, the KOSPI reached that target and kept surging to peak at 9,000, powered by a semiconductor boom and expectations of corporate governance reform.

Barely a year into his presidency, the rally is unraveling. KOSPI has fallen back to around 5,000, this time amid an even more troubling development: extreme volatility.

At the center of the volatility are single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix. The issue is weighing heavily on the Lee administration's financial team, and calls are growing for the resignations of top policymakers, as investors largely regard their countermeasures as makeshift and far from a fundamental solution.

Introduced on May 27, the funds were intended in part to draw Korean retail investors away from leveraged products listed in Hong Kong and to ease pressure on the won-dollar exchange rate. However, the products have magnified gains and losses in some of the country's most heavily traded shares, contributing to abrupt reversals across the broader market.

Eric Balchunas, a senior ETF analyst at Bloomberg, noted that Korea is not well suited to such products because the underlying shares were less liquid than those in larger markets. In such conditions, he said, "the tail can wag the dog more easily."

For individual investors, the consequences have been severe. "A year's salary vanished in just one month," a 36-year-old office worker surnamed Jeong told The Korea Times.

Citi estimated in a recent note to institutional investors that Korean retail investors had lost about $38.7 billion on single-stock leveraged ETFs over the past month.

The losses have deepened frustration among investors drawn into the market during its rapid ascent and intensified scrutiny of the officials who adopted the products.

Presidential chief of staff for policy Kim Yong-beom speaks to reporters at Cheong Wa Dae in Seoul, July 22. Yonhap

Presidential chief of staff for policy Kim Yong-beom, an early advocate of the products, intensified the backlash by suggesting that retail investors were partly responsible for the market's volatility.

"Single-stock leveraged ETFs were not solely responsible for the volatility," Kim told reporters on Tuesday at a press briefing during Lee's visit to Brazil. "It has been amplified by the structural characteristics of its market, where retail investors trade very actively."

Opposition lawmakers seized on the market turmoil as evidence of broader failures by the administration's economic team.

"Before the Lee administration, had the Korean stock market ever experienced such a roller-coaster ride, with sidecars and circuit breakers being triggered so frequently?" asked Rep. Jeong Jeom-sig, the floor leader of the People Power Party (PPP). "President Lee must immediately overhaul his entire economic team."

Rep. Lee Man-hee of the PPP also wrote on social media, “Are the people to blame for the collapse of the stock market?” He added that Kim is not reflecting on his role related to the abnormal market situation as the policy control tower.

“Does the government take credit when the market soars and do the people take responsibility when the market crashes?” the lawmaker continued. “Is it normal that the market repeats ups and downs every day? We don’t need a public official who blames the people. President Lee should sack Kim immediately.”

Finance Minister Koo Yun-cheol, center, poses with other senior financial officials before an emergency meeting on market volatility in Seoul, Wednesday. From left are senior presidential secretary for economic growth Ha Joon-kyung, Financial Services Commission Chairman Lee Eog-weon, Koo, Bank of Korea Gov. Shin Hyun-song and Financial Supervisory Service Gov. Lee Chan-jin. Courtesy of Ministry of Finance and Economy

The government has responded with a series of measures to reduce the risk of further disruption.

At an emergency meeting on Wednesday evening, officials said they were considering individual investment caps that could prevent investors from investing more than 20 percent of their portfolios in the products.

The government also said it would seek the legal authority to introduce market stabilization measures modeled on Hong Kong's variable leverage system. Under such a framework, regulators could reduce leverage ratios in response to market conditions, cutting them from two times to 1.5 times or even one on a daily basis.

However, analysts say a fundamental solution capable of taming volatility and reviving the battered index remains elusive.

"Leveraged ETFs remain among the most actively traded products by turnover," said Lee Kyoung-min, an analyst at Daishin Securities. "We need to see whether the higher minimum deposit requirement due to take effect on Friday will curb the volatility."

Balchunas also argued that leveraged products were only one mechanism through which investors expressed overwhelming demand for semiconductor stocks, rather than the fundamental cause of the boom or the subsequent decline.

"No one is gonna buy the tail unless they want the dog," he wrote on X (formerly Twitter) on Wednesday. "In this case, everybody wanted memory chip stock exposure at the same time around the world because of AI. That's the heart of the matter."

Meanwhile, KOSPI fell for a third straight session on Thursday, declining 1.23 percent to close at 5,593.56. Kosdaq slid 2.7 percent to 644.78.