How Leverage Made South Korea’s Stock Correction Worse
Leverage looks attractive when stocks are rising.
A stock rises 5%, and a 2× leveraged ETF may rise roughly 10% that day. Investors make money faster without needing twice as much capital.
But leverage works exactly the same way in reverse.
South Korea recently provided a dramatic example of what can happen when too many investors make the same leveraged bet.
Two companies dominated the market
Samsung Electronics and SK Hynix became the center of South Korea’s AI investment boom.
Together, the two semiconductor companies represented more than half of the benchmark Kospi index. This meant that movements in just two stocks could heavily influence the direction of the entire Korean market.
Retail investors poured money into these companies directly, through margin loans and through leveraged single-stock ETFs.
Between the launch of the ETFs on May 27 and June 19, Korean retail investors made approximately 8.2 trillion won in net purchases of leveraged ETFs connected to Samsung and SK Hynix.
What is a leveraged single-stock ETF?
A normal ETF may hold many companies.
A single-stock ETF follows only one company. A leveraged single-stock ETF attempts to multiply that company’s daily movement.
For example:
- SK Hynix rises 5% → a 2× ETF may rise around 10%
- SK Hynix falls 5% → the ETF may fall around 10%
- SK Hynix falls 10% → the ETF may lose around 20%
The Korean products were designed to deliver approximately twice the stock’s daily return. They were not designed to guarantee twice the stock’s return over several weeks or months.
That distinction matters because the ETF resets its leverage every day.
During a volatile market, repeated declines and rebounds can cause the ETF to lose considerably more than investors expect.
Consider a simple example:
A stock starts at $100.
It falls 20%, leaving it at $80. It then rises 20%, reaching $96.
The stock is down only 4% overall.
A 2× leveraged ETF starting at $100 would fall approximately 40% to $60. It would then rise 40% to $84.
The leveraged ETF is now down 16%.
The stock lost 4%. The leveraged product lost 16%.
The selling loop
The biggest problem was not simply that investors lost money.
Leveraged ETFs must regularly rebalance their holdings to maintain their targeted exposure.
When Samsung or SK Hynix fell, the leveraged funds had to reduce exposure by selling shares. That additional selling placed more downward pressure on the same stocks.
The process looked like this:
Chip stocks fall
↓
Leveraged ETFs suffer larger losses
↓
Funds sell shares to rebalance
↓
Margin investors face forced liquidation
↓
More shares enter the market
↓
Prices fall further
This created a feedback loop.
During one earlier selloff, analysts estimated that ETF rebalancing represented approximately 17% of SK Hynix’s daily trading volume and 10% of Samsung’s.
During another sharp decline, Goldman Sachs estimated that leveraged funds were forced to sell roughly $5 billion of SK Hynix shares to rebalance.
The funds were no longer simply following the market. Their forced trading was becoming large enough to influence it.
Borrowing made the situation worse
Many retail investors were not only buying leveraged ETFs. They were also borrowing money through margin accounts.
At one point, Korean retail investors had approximately 34.37 trillion won, or about $23 billion, in outstanding margin loans. That was only slightly below the record of 38.6 trillion won reached in June.
This created leverage on top of leverage.
An investor could borrow money from a broker and use it to buy an ETF that was itself providing twice the stock’s daily movement.
For example:
- Investor contributes $50,000
- Investor borrows another $50,000
- Total investment becomes $100,000
- The money is placed in a 2× leveraged ETF
The investor now has exposure similar to roughly $200,000 of the underlying stock.
A 10% decline in the stock could cause the ETF to lose about 20%. The $100,000 ETF position would then lose approximately $20,000.
That represents a 40% loss against the investor’s original $50,000.
A somewhat larger decline could trigger a margin call or forced liquidation.
Why forced selling is dangerous
A normal investor can decide to wait through a correction.
A leveraged investor may not have that option.
When the value of a margin account falls below the broker’s maintenance requirement, the broker can sell positions to repay the loan. The investor may be forced out near the bottom, even if the stock later recovers.
This is one reason heavily leveraged markets can fall unusually fast.
Everyone appears comfortable while prices are rising. But when prices turn, many investors are forced to sell at approximately the same time.
The selling is driven not by the companies’ long-term prospects, but by the structure of the leverage.
Regulators stepped in
The volatility became serious enough that South Korean regulators temporarily stopped approving additional single-stock leveraged products.
They also increased the minimum deposit required for retail investors to trade these products from 10 million won to 30 million won, approximately $20,000.
The Financial Supervisory Service also acknowledged that approval of the products had been prepared too hastily.
Regulators were effectively admitting that these products had grown large enough to create risks beyond the individual investors buying them.
The larger lesson
Leverage does not normally create the initial problem.
It magnifies it.
If a stock falls 10%, an unleveraged investor loses 10%.
A 2× ETF investor may lose about 20% that day.
An investor who borrowed money to buy that 2× ETF may lose 40% or more of their original capital.
If enough investors are positioned this way, their forced selling can push the stock lower, trigger additional margin calls and create another round of selling.
That is how an ordinary market correction can turn into a market-wide liquidation event.
Leverage feels harmless during a bull market because rising prices hide the risk.
The real test begins when prices fall.