"It's Crazy"! South Korean Retail Investors "Shift from Seoul to Wall Street": Buying SK Hynix ADRs and Betting on 3x Leveraged ETFs

The severe turbulence in South Korea's domestic stock market is pushing a large number of retail investors toward the U.S. market—but they are still betting on the same AI theme.

According to data from the Korea Securities Depository, South Korean investors net purchased approximately $4.5 billion in U.S. stocks in July, a significant increase from June and approaching the peak level of $5 billion seen in January this year. Meanwhile, data from the Korea Exchange shows that for most of last week, South Korean retail investors continued to net sell domestic stocks, even as the benchmark index entered technical bull territory, while overseas investors turned to net buying.

The most notable move in this capital outflow is that South Korean investors spent approximately $840 million buying American Depositary Receipts (ADRs) of SK Hynix listed in the U.S., even though they could have directly bought shares of the same company domestically. At the same time, the triple-leveraged semiconductor ETF SOXL ranked first as the most popular U.S. stock product among South Korean investors in July, with leveraged products occupying four spots among the top ten net-buy targets for the month.

Analysts warn that South Korean retail investors' move of "changing venues but not bets" has not effectively diversified risk. The ADR premium and the prevalence of leveraged products are typical signals of overheated speculation, which may create greater volatility in local markets.

Buying ADRs: Still Snapped Up Despite a 10% Premium, Experts Exclaim "It's Crazy"

Of the $4.5 billion in U.S. stocks net purchased by South Korean investors in July, about $840 million flowed into SK Hynix's American Depositary Receipts, making it the second-largest net-buy target among U.S. securities for South Korean investors.

This behavior has puzzled market observers. Owen Lamont, Senior Vice President at Acadian Asset Management, pointed out that SK Hynix ADRs recently traded at a premium of about 10% relative to their South Korean domestic shares and exhibited higher volatility. Lamont stated:

"This is absolutely crazy; there is no reason for South Korean investors to buy American Depositary Receipts of South Korean stocks."

Lamont indicated that such price divergence is unusual and often serves as a warning signal of overheated speculation. "This is a symptom of a bubble," he said, comparing this phenomenon to similar misalignments seen in Indian company ADRs during the dot-com bubble.

Leveraged Bets: Triple ETFs Lead the Pack, High-Risk Products Cluster

As South Korean investors flock to U.S. stocks, their preference for high-leverage products is equally noteworthy.

According to data from the Korea Securities Depository, four of the top ten net-buy U.S. stock targets in July were leveraged products. Among them, Direxion Semicon Bull 3X took the top spot—this product aims to track three times the daily performance of a semiconductor index. ProShares UltraPro QQQ and ProShares Ultra QQQ ranked fourth and sixth, respectively.

So far this month, the ProShares Ultra QQQ ETF has also made it into the top ten popular U.S. stocks among South Korean investors, ranking seventh.

Despite the flow of capital from Seoul to Wall Street, several analysts pointed out that the core logic of South Korean retail investors has not changed.

Phillip Wool, Research Director at Rayliant Global Advisors, stated:

"Ironically, if you carefully dissect the data and look at what they are buying, you will find that most of it is still linked to the AI hardware theme—which is precisely the sector that has suffered sharp declines in the domestic market recently."

Jung In Yun, founder of Fibonacci Asset Management, believes that some traders who suffered losses in South Korean semiconductor stocks or leveraged ETFs are turning to U.S. AI stocks, which they perceive as having higher quality and better liquidity.

"They are not necessarily reducing their exposure to the AI theme; they may just be changing the geographic vehicle to express the same view."

Risk of Local Distortion Greater Than Systemic Shock

Will the influx of South Korean capital cause a substantial impact on the U.S. market? Analysts hold varying views, but generally believe that systemic risk is limited.

Wool believes the risk is not significant. He pointed out that while retail investors can exert disproportionate influence in the South Korean market, the U.S. market is dominated by professional institutions. Even relatively large inflows from South Korea are negligible compared to overall trading volume.

Lamont is more concerned about the risk of distortion at the local level. He noted that South Korean investors flocked to U.S. "quantum concept stocks" in late 2024 and warned that the widespread proliferation of leveraged ETFs in South Korea, Hong Kong, and the U.S. "may be exacerbating volatility and amplifying market swings."

The exodus of South Korean retail investors has deep roots in their domestic market context.

Previously, a strong rally drew a large number of retail investors into semiconductor stocks and leveraged products, followed by a sharp market correction. According to data from the Financial Investment Association of Korea, margin balances in the South Korean stock market were approximately KRW 37 trillion (about $26 billion) at the end of June, before plummeting to KRW 27 trillion earlier this month, hitting a new low for the year.

Lamont stated that while the scale of U.S. stock purchases in July was "strong," it was not unprecedented. "But interestingly, they increased their buying of U.S. stocks even as the South Korean market plunged."