Retail "Ant Army" Floods into Leveraged ETFs, Plunging South Korean Stock Market into Unprecedented Volatility

This year, driven by the AI chip boom, the South Korean stock market has recorded astonishing gains, yet it has also become the most volatile major stock market globally—with its volatility even surpassing that of Bitcoin, which is known for its 剧烈 oscillations.

The volatility of South Korea's benchmark KOSPI index has exceeded 60% this year, nearly double that of Japan's Nikkei 225 Index and even higher than that of Bitcoin, a cryptocurrency renowned for its high risk. By the end of July, severe market fluctuations had forced the Korea Exchange to trigger the "circuit breaker" mechanism nine times this year to suspend trading and curb panic flash crashes. In contrast, this mechanism was not used at all in 2025 and was triggered only once in 2024.

In South Korea, retail investors are referred to as "ants," a term reflecting their tendency toward collective action: when stocks fall, it easily triggers panic selling stampedes, while when stocks rise, fear of missing out (FOMO) drives buying frenzies at high levels. Although Wall Street institutions assess that the recent wave of forced liquidations has largely cleared high-leverage funds from the market, the structural fragility of the South Korean stock market, characterized by extreme index concentration and significant retail herd behavior, continues to profoundly impact investors' risk exposure and trading strategies.

Two Chip Giants Hold the Index Hostage

The roller-coaster ride of the South Korean stock market stems from the overwhelming dominance of Samsung Electronics and SK Hynix in the KOSPI index. As suppliers of memory chips required for new-generation AI systems, both companies have seen explosive profit growth and rapid stock price surges. Together with their respective listed affiliates, they account for over 50% of the KOSPI's weight. This means that index funds tracking the KOSPI have effectively evolved into concentrated bets on the AI sector.

The distorting effects of this high concentration are evident: when the KOSPI hit a record high in late June, more than 650 of its 831 constituent stocks actually declined.

The investment boom in AI infrastructure is the direct driver behind the soaring stock prices of these two companies—hundreds of billions of dollars are flowing into AI platforms and data center construction, betting that the transformative potential of this technology will eventually yield substantial returns. However, current revenue generated from AI for end-users is insufficient to cover construction costs, making valuations of related stocks extremely sensitive to changes in investor sentiment.

In late July, concerns that U.S. tech giants like Meta Platforms were overbuilding data centers, coupled with earnings below expectations, caused SK Hynix's stock price to plummet 27% in just three trading days. Subsequently, the stock hit the South Korean market's 30% daily upper limit, driving a historic 18% rebound in the KOSPI. Such extreme single-day volatility is a microcosm of the current market structure.

Leveraged ETFs Act as Market Amplifiers

The 野蛮 growth of the leveraged ETF market in South Korea is another core variable in this round of volatility. Leveraged ETFs use derivatives and debt instruments to amplify the daily returns of underlying indices or assets, typically by a factor of two, carrying extremely high risk. In most global markets, the primary buyers of such products are professional traders and institutional investors, whereas in South Korea, ordinary retail investors using savings to enter the market without systematic financial training are the main holders.

The origins of South Korea's leveraged ETF market can be traced back to 2010, when Samsung Asset Management launched the KODEX leveraged product, a 2x KOSPI 200 Index ETF, hailed by the company and South Korean media as Asia's first leveraged ETF. For over a decade thereafter, this market was largely limited to products tracking broad-based indices.

Regulators were not unaware of the risks. In 2025, South Korean financial regulators attempted to restrict investor demand for overseas leveraged ETFs. However, this year they approved the establishment of more than ten leveraged ETF products tracking single stocks, specifically Samsung Electronics and SK Hynix, with 90% of the shares currently held by retail investors. According to calculations by Goldman Sachs strategists in late June, the asset size of leveraged ETFs tracking indices and single stocks in South Korea soared from approximately $5 billion at the beginning of the year to over $40 billion.

At peak times, these ETFs, combined with the two chip stocks they track, contributed over 70% of the single-day trading volume in this $3.4 trillion market, significantly amplifying the market impact of individual stock price movements. Following the sharp market decline in late July, the government promised to take measures to limit retail access to leveraged ETFs, including setting caps on the proportion of holdings relative to investors' total assets and increasing transaction costs. According to a report by JPMorgan strategists on July 29, the deleveraging process of leveraged ETFs is basically complete, with about 90% of hedge fund deleveraging operations concluded, and the scale of borrowed stock purchases has fallen from its June peak.

The Game Between Retail "Ants" and Foreign Capital

Accompanying the dominance of the two chip giants is the unprecedented enthusiasm of South Korean retail investors entering the market. Since the beginning of the year, local individual investors in South Korea have cumulatively bought over 110 trillion won (approximately $77 billion) worth of KOSPI stocks. While these funds have lowered financing costs for the two companies and supported their expansion plans, they have also further pushed up stock price volatility.

In stark contrast to the massive buying by retail investors is the continuous outflow of foreign capital. Foreign fund managers, needing to compress their holdings of Samsung and SK Hynix to reasonable proportions to avoid excessive concentration, have net sold approximately $115 billion worth of KOSPI stocks this year, with foreign withdrawal from SK Hynix alone exceeding $40 billion.

In South Korea, retail investors are called "ants," a term reflecting their tendency toward collective action: when stock prices fall, it easily triggers panic selling stampedes, while when prices rise, they often swarm to buy at high levels, fearing they will miss the rally. In contrast, institutional investors tend to hold their positions when companies face difficulties and have a clearer judgment of fundamental value—this structural difference is one of the deep-rooted causes of the unceasing volatility in the South Korean market.

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