The main and annex buildings of the Bank of Korea in Jung-gu, Seoul. [Herald DB]
The main and annex buildings of the Bank of Korea in Jung-gu, Seoul. [Herald DB]

South Korea's stock market has been gripped by heightened volatility driven by leveraged exchange-traded funds that track individual semiconductor stocks such as Samsung Electronics and SK hynix.

Critics say the products — introduced to broaden the domestic equity market — have instead funneled demand too heavily into a handful of blue-chip names, amplifying share price swings and pushing financial risk for retail investors to dangerous levels. The Bank of Korea has now issued an official warning.

In a written response submitted Saturday to People Power Party lawmaker Park Sung-hoon, the Bank of Korea said that "with Samsung Electronics and SK hynix already accounting for more than half of the stock market's total market capitalization and trading volume, further expansion of investment in single-stock leveraged ETFs could deepen this concentration." The central bank added that "the degree of concentration on certain companies in the domestic stock market has grown sharply, driven in part by strong semiconductor earnings," and that "single-stock leveraged ETFs can amplify one-directional trading as inflows and outflows expand in response to changes in the business environment or market expectations."

The combined market capitalization share of Samsung Electronics and SK hynix on the Korea Stock Exchange surged from 36.1 percent at the end of last year to 55.3 percent as of June 24, while their share of trading value jumped from 27.9 percent to 63.5 percent.

The Bank of Korea sees single-stock leveraged ETFs as a force that could push this concentration even further.

The central bank also warned that "when share prices correct, retail investors face amplified losses, and redemptions or position rebalancing could in turn act as a factor that widens share price volatility." It added that "as leveraged ETF investment grows, the risk of amplifying share price volatility through daily rebalancing and spot-futures arbitrage trading remains ever-present."

The assessment marks a notable shift from the Bank of Korea's financial stability report released June 24.

In that report, the central bank said single-stock leveraged ETFs would "help prevent domestic investment funds from flowing overseas and attract foreign capital by correcting the regulatory imbalance with overseas-listed ETFs." It also expressed hope that the products would "absorb high-risk, high-return demand for domestic blue-chip stocks and contribute to broadening the domestic equity market and strengthening price discovery."

While the report acknowledged the possibility of greater share price volatility, the Bank of Korea emphasized that "given the current market capitalization and trading share of the underlying assets, the impact on the market is limited."

The central bank has sharply raised its warning level in just 10 days. Financial Supervisory Service chief Lee Chan-jin had already struck an unusually candid tone at a press briefing on June 22 — two days before the Bank of Korea's financial stability report — saying he was "personally reflecting on whether I should have thrown myself on the ground to block" the ETF's introduction.

Lee indicated that the ETFs had done little to bring overseas capital back home while generating outsized side effects. Financial markets and academics broadly share that view.

Lee Hyo-seop, a senior research fellow at the Korea Capital Market Institute, said he does not consider single-stock leveraged ETFs the primary driver of volatility in the Korean market, but acknowledged they "may have amplified volatility stemming from domestic and external factors." He added that semiconductor stocks "have risen sharply in a short period and could fall at any time," warning that "when share prices swing, retail investors who average down their positions risk compounding their losses."

The Bank of Korea said it plans to step up monitoring and oversight, citing concern that mounting retail investor losses could ultimately threaten financial stability at a macroeconomic level.

As financial regulators weigh raising the barriers to entry for single-stock leveraged ETF investment, the central bank is expected to weigh in during consultations with the authorities. The Bank of Korea said it "plans to strengthen monitoring and review of the impact of single-stock leveraged ETFs on the stock market and the financial system," and that it "will also consult closely with relevant authorities to address related risks."


attom@heraldcorp.com