South Korea's Leveraged ETFs Linked to Chipmakers Experience $1B Outflow

South Korean investors have withdrawn nearly $1 billion from leveraged exchange-traded funds (ETFs) associated with the nation's leading chipmakers, Samsung Electronics and SK Hynix, in August. This marks the first monthly outflow since the ETFs were launched in late May 2023, following a period of intense demand.

Initially, these leveraged funds attracted approximately 14 trillion won (around $9.7 billion) from retail investors, leading to a peak in assets under management of about 28 trillion won. However, the situation dramatically shifted as the KODEX SK Hynix Single Stock Leverage ETF plummeted over 80% from its peak, while its Samsung counterpart fell roughly 75%.

The downturn in these ETFs coincided with a broader decline in South Korean equities, with the KOSPI index dropping 22% in July alone. Samsung's stock fell by 21.5%, and SK Hynix experienced a 35.5% decrease, exacerbating losses for retail investors who had heavily invested in these leveraged products.

In response to the dramatic outflows and the subsequent market turmoil, South Korea's finance minister publicly apologized for the lack of safeguards surrounding these investments. Regulatory measures were swiftly implemented, including a tripling of the minimum cash requirement for new investors and a halt to new product listings. These changes resulted in a significant drop in trading volume, with daily turnover for the leveraged ETFs decreasing by over 90%.

Despite the cooling demand for leveraged ETFs, retail investors have shifted their focus to equity-linked securities (ELS), which offer annualized coupons of 40% to 50%. In July, sales of ELS products reached approximately 3.5 trillion won, the highest monthly total since April 2023, indicating a continued appetite for risk among South Korean investors.