South Korea: $1.5 Billion Lost Due to Leverage Effect

The "Roller Kospi" Crushes Small Investors in South Korea

Driven by the surge in semiconductors (Samsung Electronics and SK Hynix alone account for half of the index), the KOSPI remains the best-performing major market globally this year. However, volatility has become extreme on this South Korean index: on Monday, July 13, the KOSPI (Korea Composite Stock Price Index) plunged nearly 9%, triggering its sixth trading suspension of the year, leading local media to nickname it the "Roller Kospi."

For individual investors, the toll is staggering. According to a note from Goldman Sachs reported by ZeroHedge, over 1.2 million leveraged accounts had faced margin calls by July 13, and between 320,000 and 360,000 accounts were completely liquidated by brokers. This translates to 1 in 30 Korean adults. Individual losses from leveraged trading reached 2.15 trillion won (approximately $1.5 billion) in just the past month. A painful detail: 62% of the wiped-out accounts belonged to investors aged 20 to 30.

Leveraged ETFs on Single Stocks: A Liquidation Machine

The epicenter of the disaster has a name: leveraged ETFs (x2) linked to a single stock. Launched on May 27, these 16 products tied to Samsung and SK Hynix experienced explosive success... and an equally spectacular crash. The ETF "KODEX SK Hynix x2" has lost 66.6% since its peak on June 23, including -31.46% in a single session on Monday. Its Samsung counterpart has melted down by 60.4%. Mechanically, leverage doubles the movements of the underlying asset: when SK Hynix drops by 15%, the product collapses by over 30%.

Worse, these products fuel the spiral they are caught in: losses, margin calls, forced sales, further declines... Even in real life, as South Korean media report postponed weddings and drained retirement savings. The shockwave has even become continental. More than $600 billion has been wiped off Asian stock markets in a second consecutive day of losses: -4.4% for the Japanese Nikkei, -2.4% in Taiwan, -2% in China. The KOSPI, however, escaped the session: the Seoul Stock Exchange is closed for Constitution Day on July 17. A well-timed respite for small South Korean investors.

The Financial Regulator Calls Time on the Playground

In light of the extent of the damage, the Financial Services Commission (FSC) rolled out emergency measures on Thursday, July 16 (a rare occurrence, especially less than two months after the launch of the products): suspension of any new listings of leveraged ETFs on single stocks until market stabilization, tripling of the minimum deposit required for traders (from 10 to 30 million won, approximately $20,300 now) starting August 5, mandatory one-hour training, and a freeze on promotional activities.

The Lesson to Be Learned: Leverage is Not Investment

The Korean episode is not a condemnation of ETFs, of course, but an absurd demonstration of what separates investment from speculation. A classic ETF replicating a broad index (S&P 500, MSCI World, Nasdaq 100...) spreads risk across hundreds of companies, without leverage. But a leveraged x2 ETF on a single stock concentrates all risks: that of the company, the sector, and the deadly risk of leverage.

To gain exposure to equity markets without playing with the dangerous effects of leverage, diversified index ETFs remain accessible to European investors through regulated brokers.