South Korean President Lee Jae Myung is under intense scrutiny following a tumultuous July in the stock market, where the Kospi index plummeted 22%, the steepest monthly decline since the global financial crisis. His administration's push for stock market reforms and the debut of single-stock leveraged ETFs, intended to boost local investment and prevent capital outflow, backfired dramatically. Retail investors, encouraged by the prospect of amplified gains, poured approximately 78 trillion won ($54.2 billion) into Kospi shares in May and June, only to be hit by wild market swings.
The introduction of these leveraged ETFs, which allowed investors to amplify their exposure to individual stocks, is now largely blamed for exacerbating market volatility. More than 1.2 million retail investors who borrowed money to invest received margin calls, and around 360,000 accounts were forcefully liquidated. Media reports indicate that over 60% of these liquidated investors were under 30, losing not only their investments but also incurring debt. The KODEX SK Hynix Single Stock Leverage ETF fell over 80% from its June peak, and the Samsung equivalent dropped almost 75%.
Authorities have responded by temporarily halting new listings of single-stock leveraged ETFs in mid-July and pledging further measures to stabilize the market and restrict retail access to such products. The minimum cash deposit for trading these products was raised from 10 million won to 30 million won (about $20,300) effective early August. However, many investors and market participants, including Jung Eui-jung, head of the Korean Stockholders' Alliance, believe these actions came too late, with anger and criticism against the government reaching a peak. The market experienced a record four circuit-breaker suspensions in July.
Individual stories highlight the depth of the crisis: Kim Han-kyung, a Seoul resident, resolved never to invest in the Korean stock market again, describing the July experience as a "mania" that swept her up. Lee Jung-min, 40, who took a 50 million won loan against his apartment to trade stocks, expressed his frustration, stating, "The government put fuel into the fire with those leveraged ETFs." Lale Akoner, a global market analyst at eToro, characterized the situation as a "textbook example of what happens when a crowded trade meets leverage," warning of continued sharp swings in technology and semiconductor stocks.
Finance Minister Koo Yun-cheol issued an apology in a parliamentary session for the poorly considered introduction of these products, and FSC Chairman Lee Eog-weon mentioned considering limiting these ETFs to professional investors and reducing leverage multiples. Despite a stunning 18% rebound on the last Friday of July, retail investors still sold a record amount of Kospi shares, with the index closing the month down 22%. While the AI boom remains intact, the July rout served as a harsh lesson that rebuilding investor confidence will be a long process.
