South Korean traders' leveraged bets on SK Hynix and Samsung unravel after selloff

A wave of margin calls and steep losses has hit South Korean retail investors who piled into leveraged exchange-traded funds (ETFs) betting on tech giants SK Hynix and Samsung Electronics, following a sharp selloff in the stocks. The downturn has triggered demands from traders to return their money, as their highly leveraged positions unraveled.

The affected investors are mostly individual traders who used leveraged ETFs—financial products that amplify daily returns of an underlying stock—to speculate on the continued rise of SK Hynix and Samsung shares. These products, which can double or triple daily gains or losses, have become popular in South Korea's stock market, known for its high retail participation. The selloff has wiped out significant portions of their investments, leading to widespread losses.

This matters because the episode highlights the risks of leveraged investing in a market that has been one of the world's best-performing in recent years. The South Korean government had promoted stock market investment as a way to boost household wealth, but the backlash from these losses is prompting regulatory action. The Financial Times described the market as "a casino for investors" due to the huge swings caused by leverage.

According to reports, the selloff in SK Hynix and Samsung shares triggered margin calls on leveraged ETFs, forcing investors to either add funds or face forced liquidation. The exact number of affected traders and total losses have not been disclosed, but the incident has drawn attention from regulators. The Wall Street Journal reported that South Korea's regulator has unveiled curbs on high-risk ETFs, while Reuters noted that the country plans to ban new listings of single-stock leveraged ETFs.

Background: South Korea's stock market has seen a surge in retail trading, with many investors using leverage to amplify returns. The government's push for stock market participation, sometimes called the "Korea President's Stock Dream," has encouraged this trend. However, the recent selloff in semiconductor stocks—key drivers of the market—has exposed the fragility of leveraged strategies.

Looking ahead, the regulatory response includes immediate curbs on high-risk ETFs and a ban on new listings of single-stock leveraged ETFs. These measures aim to protect retail investors from excessive risk, but they may also dampen trading volumes and affect the popularity of such products. The incident serves as a cautionary tale about the dangers of leverage in volatile markets.