The Bank of Korea has reported that a surge in investments in leveraged exchange-traded funds (ETFs) has contributed to increased stock market volatility in South Korea. The analysis indicates that the rise in individual 'debt investment' and the accumulation of leveraged positions, both domestically and internationally, have amplified the fluctuations in stock prices.
In its 'Monetary and Credit Policy Report' released on September 10, the Bank noted that this year's stock price volatility is at a higher level compared to past crisis periods and major countries.
The Bank assessed that the significant increase in leveraged ETF investments, driven by expectations of a sustained upward trend in stock prices, has played a role in heightening volatility in the domestic stock market from a supply and demand perspective. It was found that individual investors' borrowing for stock investments reached an all-time high before being liquidated, which further intensified the upward and downward movements of stock prices.
Additionally, the increase in foreign leveraged investments in the domestic stock market has also contributed to volatility. As leveraged investments targeting South Korean stocks have risen in international financial markets, domestic spot and futures trading for hedging purposes has increased, leading to unexpected spillover effects on the domestic market.
However, it was noted that following a significant correction in domestic stock prices, a considerable portion of leveraged positions has been liquidated, resulting in a slight easing of volatility. The Bank suggested that there is a need to strengthen monitoring of leveraged ETFs and borrowing for stock investments.
The high volatility in the domestic stock market has also been attributed to the concentration in the semiconductor sector. With growing expectations for a global artificial intelligence and semiconductor boom, stock price increases have been concentrated among a few semiconductor companies, leading to heightened sensitivity to changes in the outlook for memory semiconductor markets.
Since June, the domestic stock index has experienced significant corrections following sharp declines in the stock prices of related companies. During the rise of the KOSPI from 8,000 to 9,000, Samsung Electronics and SK Hynix accounted for an estimated 99.0% of the index's increase, with contributions of 44.7% and 54.3%, respectively.
Conversely, when the KOSPI fell from 9,100 to 5,500, Samsung Electronics (29.8%) and SK Hynix (39.6%) had a relatively high contribution to the decline at 69.3%.
The Bank of Korea noted that due to the high market concentration in the semiconductor sector and certain companies, changes in the outlook for specific sectors could quickly transfer to the overall stock market.
In the medium to long term, the Bank emphasized the need to reduce market concentration on specific sectors and companies, expand the investor base, and improve the capital market structure to enhance market resilience against domestic and external shocks.
During a briefing, Bank of Korea Deputy Governor Park Jong-woo stated, "While the scale of leveraged ETFs has decreased, it is not a situation to be complacent about, and we must continue to monitor it closely."
* This article has been translated by AI.
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