The sharp reversal in South Korea's semiconductor stocks has left many retail investors nursing heavy losses after leveraged bets on the country's artificial intelligence champions unravelled, exposing the risks of a retail trading boom built on borrowed money.
The sell-off has hit investors in single-stock leveraged exchange-traded funds tied to Samsung Electronics and SK Hynix, which had surged alongside the AI-driven rally before tumbling in recent weeks, according to CNBC.
South Korean online trading forums have since filled with messages from investors reeling from losses after SK Hynix's record one-day decline last week, CNBC reported.
"I want to go back to before I started investing in stocks. Give me my money back," CNBC reported quoting an investor.
"You're determined to kill me," The report said quoting another investor.
The losses have highlighted how retail investors' growing use of leverage through margin loans and leveraged investment products has magnified swings in South Korea's technology stocks. Regulators have since stepped in with tighter restrictions as borrowing reaches record levels.
Among those caught in the downturn is Lee Seung-ho, a 24-year-old university student in Seoul, who told Reuters he watched a trading portfolio that briefly reached nearly 300 million won ($202,515) disappear within four weeks after markets turned against him.
Lee said he had turned the 20 million won he saved during his mandatory military service into a portfolio worth about 15 times that amount by using a 500% margin loan available through his trading application. When volatility triggered forced liquidations by his brokerage, his gains disappeared and his account fell below his original investment.
"I literally could not breathe," Lee told Reuters.
Despite the losses, Lee said he intends to borrow again once he has rebuilt enough capital.
"But I'm sticking to margin loans," he told Reuters.
Lee said his ambition is to buy an apartment in Seoul. With housing prices averaging about 14 years of salary, many young South Koreans see leveraged investing as one of the few ways to build wealth, Reuters reported.
Rules Tighten
According to CNBC, citing KB Financial Group data, South Korean retail investors have bought a net 14 trillion won ($9.4 billion) of single-stock leveraged ETFs since the products were introduced on May 27. Foreign investors, by comparison, purchased about 2 trillion won over the same period.
CNBC, citing LSEG data, reported that the KODEX SK Hynix Single Stock Leverage ETF, which aims to deliver twice the daily movement in SK Hynix shares, has fallen about 70% from its June peak and about 50% since its debut.
Separately, Reuters reported that margin loan balances in South Korea's domestic stock market reached a record 38.63 trillion won on June 24, citing the Korea Financial Investment Association, before easing to 34.37 trillion won as of July 15. Bank of Korea data showed total investor borrowing, including other forms of debt, exceeded 60 trillion won at the end of May.
"The investors bearing the losses are overwhelmingly domestic retail investors," Jung In Yun, founder of Fibonacci Asset Management, told CNBC.
CNBC also cited Oxford Economics as saying leveraged Korea-focused ETFs accounted for about 30% of assets in the country's 25 largest leveraged funds by June, compared with roughly 15% at the start of the year. The consultancy downgraded South Korean equities to "neutral" at the end of June, warning that leveraged positioning had increased sharply.
The Bank of Korea also warned last month that leveraged stock investing among retail investors had climbed to a record high, driven mainly by margin borrowing and concentrated semiconductor positions. While the central bank said the build-up was unlikely to threaten financial stability, it cautioned that leverage could amplify volatility during market corrections.
South Korean authorities have since moved to curb speculative trading. CNBC reported that regulators raised the minimum cash requirement for investors trading single-stock leveraged ETFs to 30 million won from an effective minimum of 3 million won. Reuters separately reported that authorities also banned new listings of leveraged ETFs linked to individual stocks.
"The FSS Governor has already admitted these products were approved too hastily, so this is a correction of a known policy error," Inki Cho, senior financial market strategist at Exness, told Reuters.
"For retail investors holding these products, the risk is asymmetric: the leverage accelerates losses on the downside far faster than it builds wealth on the upside in a volatile tape like this."
Peter Kim, head of global investment strategy at KB Financial Group, told CNBC the losses showed that single-stock leveraged ETFs had become vehicles for speculative trading rather than long-term investing.
"There are no signs of massive bailout of the market by the Korean retail investors, but if the overhang over the ETFs and should the slump and volatility persist, it could lead to a prolonged slump," Kim told CNBC.
Thomas J Hayes, chairman and managing member of Great Hill Capital, also told CNBC that semiconductor and memory-chip stocks had become the most crowded trade among institutional and retail investors globally, suggesting the unwinding may not yet be over.
Even after seeing his gains disappear, Lee said he still believes leverage offers the best chance of reaching his financial goals.
"I've often compared this to poker: if you go all-in every single time, you are bound to lose," Lee told Reuters.
"But if you have the discipline to only deploy that capital when the mathematical odds are heavily in your favour, it is actually quite difficult to get repeatedly wiped out in a single shot."
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