Retail investors have laid funeral wreaths outside South Korea’s National Assembly after leveraged ETFs tied to the country’s two largest chipmakers magnified losses in a historic market rout.
Scott Galloway says they all made a familiar mistake: in good times, it’s easy to “mistake leverage for IQ.”
On Monday’s Prof G Markets episode, Galloway and co-host Ed Elson traced the rout to single-stock leveraged ETFs tracking Samsung (OTC:SSNLF) and SK Hynix (NASDAQ:SKHY), launched in late May.
The KOSPI suffered a roughly 40% peak-to-trough drawdown from its June high, then surged a record 17.9% Friday before falling nearly 5% Monday.
The index erased roughly $2 trillion in value from its June record, according to Reuters.
The U.S.-listed iShares MSCI South Korea ETF (NYSE:EWY) fell about 0.5% in Monday morning trading as the volatility continued.
Why Two Stocks Can Whipsaw the KOSPI
Samsung and SK Hynix together make up more than half the KOSPI’s value. A bet on those two stocks is close to a bet on the whole index.
The new ETFs promised double the daily move of either name. The catch is how they keep that promise: to stay at 2x, the funds must buy more shares when the stock rises and dump shares when it falls.
That means every down day triggered automatic selling, which pushed prices lower, which triggered more selling the next day. Samsung nearly halved from its June peak. SK Hynix followed a similarly brutal path, and the index went with them.
This was overwhelmingly a retail phenomenon. Ordinary investors held 92% of the money in these ETFs, and Citi puts total retail losses from the rout at roughly $38.7 billion.
The margin calls came next. Goldman Sachs estimates more than 1.2 million leveraged retail accounts have triggered them, equivalent to about 3.4% of South Korea’s adult population. “It was never institutional risk. It was household risk,” Galloway said.
Korean retail traders weren’t the only ones making leveraged bets on AI stocks. A famous hedge fund blew up the same way, in the same week, on the same names.
Leopold Aschenbrenner’s Situational Awareness fund spent the first half of the year as one of the hottest funds on the planet, riding leveraged bets on AI stocks including SK Hynix.
In July it lost two-thirds of its value and sold most of its portfolio to Ken Griffin’s Citadel.
Galloway’s takeaway: “Leverage doesn’t create risk. It removes your margin for being wrong.”
The Crowd Is Not Buying the Doom
Galloway predicted “a half a dozen” significant forced-selling events in August as leveraged AI investors hit their first speed bump. “We’re going to see who has airbags,” he said.
Prediction-market traders remain considerably calmer.
Polymarket puts the probability of its defined AI bubble-burst scenario occurring by the end of 2026 at about 19%.
The complacency comes as U.S. leveraged ETF assets sit near record highs, with $198 billion still invested and semiconductor products among the biggest concentrations according to Citadel Securities.
Image: Shutterstock
Login to comment