AI-led or margin-driven? How leveraged chip bets have made Korean markets more fragile

The Korean markets have been among the top performers globally this year, dominating headlines for both their strong gains and growing investor interest. Despite a sharp selloff on Tuesday, the benchmark KOSPI has surged more than 100% year-to-date in 2026, leaving global institutional and retail investors impressed by its stellar performance.

The rally has been primarily driven by optimism surrounding major chipmakers such as SK Hynix and Samsung Electronics, which together produce a significant share of high-bandwidth memory (HBM) chips, which are critical to AI infrastructure and data centre expansion.

The share prices of SK Hynix and Samsung Electronics have delivered euphoric multifold returns in a very short period. Naturally, the stellar rally and its strong potential for further growth attracted retail investors, institutions, and offshore companies to invest and participate in this euphoric rally.

However, investor participation has now taken a more aggressive turn, with retail investors, offshore funds, and domestic institutional investors increasingly placing highly leveraged bets.

Historically, periods of excessive optimism and leverage have often ended in sharp market corrections, leaving retail investors particularly vulnerable.

High margin debt

Like every euphoric market cycle, Korean retail investors and institutions have heavily concentrated their bets on the top-performing stocks, namely Samsung Electronics and SK Hynix.

The pursuit of higher returns has fueled a surge in margin-led borrowing, which reached KRW 38 trillion ($24.5 billion) as of May 2026, up sharply from KRW 27 trillion ($17.5 billion) at the end of 2025.

Leverage has risen significantly in Samsung Electronics and SK Hynix as well, the two chipmaking giants that have led the Korean market rally.

Outstanding margin loans linked to Samsung Electronics stood at KRW 4.76 trillion ($3.0 billion), while those tied to SK Hynix totaled KRW 4.3 trillion ($2.78 billion). Combined, the two stocks account for KRW 9.1 trillion ($5.8 billion) in outstanding margin loans, marking a multifold increase from KRW 2.5 trillion ($1.6 billion) in December 2025.

The rapid rise in leveraged positions is a double-edged sword.

During a rally, leverage can magnify gains and boost returns. However, during periods of volatility, it can accelerate losses and trigger forced selling.

Market analysts in South Korea warn that these elevated leveraged positions could amplify selling pressure and deepen market declines if sentiment turns adverse.

Leveraged ETFs

The rally in chipmaking stocks has also fueled demand for increasingly complex and riskier investment products among Korean retail investors.

Many traders have piled into single-stock leveraged ETFs, which are designed to amplify the daily returns of an underlying stock by two or even three times, depending on the product structure.

Originally launched in Hong Kong, these complex financial products were recently introduced in South Korea, allowing domestic investors to gain exposure through locally listed instruments rather than accessing similar products traded offshore.

While these ETFs can significantly boost gains during a sustained rally, they also magnify losses when markets reverse, adding another layer of risk to an already highly leveraged market environment.

According to an investing.com report, the single-stock leveraged ETF for Samsung and SK Hynix now holds $9.1 billion in assets under management as of last week, compared to $3 billion at launch in May. The Hong Kong-traded ETF held $14 billion in assets, one of the largest of its kind.

Part of Tuesday’s fall in Korean markets was triggered by the comments of the chief of the Korean market regulator, Lee Chang-Jin, Governor, Financial Supervisory Service. Lee expressed his regret that he allowed the launch of a leveraged product in the domestic market. He said, “Half-joking, but I should have just stayed put then, and I have a lot of regret”.

The single stock-leveraged ETFs are complex products that are designed to mimic the price performance of the underlying stock through derivatives. In a one-sided market, the products’ NAV generates 2x the returns of the underlying stock. If the shares of Samsung Electronics rises 2%, the ETF NAV jumps 4% and vice versa.

In Tuesday’s market rout, the single-stock leveraged ETF for Samsung and SK Hynix plunged over 23% after the stock price of the chipmakers plunged 12%.

Goldman Sachs, in a note, said that a 5% swing in Korean markets could trigger roughly $4.7 billion in rebalancing of flows by option dealers adjusting their hedges, which is roughly one-eighth of all shares traded on a normal day.

Flash crashes

High levels of margin-driven speculation by retail investors, coupled with the widespread use of leveraged equity-linked products, have made Korean markets increasingly fragile and vulnerable to sharp bouts of volatility.

Even a modest negative development in the AI investment cycle could trigger a rapid selloff, wiping out billions of dollars in market value within hours. Such declines could be further amplified by brokers forcing the unwinding of leveraged positions to manage liquidity and margin requirements, creating a cascading effect across the market.

Signs of elevated volatility are already emerging. The Korean market-wide circuit breaker has been triggered four times in 2026 alone, compared with eight activations between its inception and the end of 2025. This sharp increase highlights the growing sensitivity of the market to sudden shifts in investor sentiment and liquidity conditions.