Seoul – The sharp rally that lifted South Korea’s KOSPI to record highs in June has reversed dramatically, erasing about 30% of its value and leaving thousands of individual investors in distress. The decline has become a political flashpoint for President Lee Jae‑myung’s administration, which had promoted new leveraged exchange‑traded funds (ETFs) as a way to close the so‑called “Korea Discount” and boost the market’s global standing.
Government‑backed leveraged products
In January, regulators began discussing single‑stock leveraged ETFs that use derivatives to multiply a stock’s daily return. The presidential office argued that products permitted on the NASDAQ should be available in Korea, and the Financial Services Commission approved the funds for launch on May 27. Investors were required to complete a one‑hour training course and provide a minimum deposit of 10 million won (about $7,200).
President Lee’s team framed the move as essential to attracting foreign investment and moving the KOSPI onto MSCI’s developed‑market list. Yet internal concerns were raised about whether domestic investors fully understood the risk of rapid, amplified losses.
Retail investors caught in a leveraged frenzy
During the rally, many Korean savers turned to margin loans to amplify returns. Loan balances rose roughly 75% from the start of the year to 30 trillion won by late June, according to the Korea Financial Investment Association. Some investors reported gains of up to 66% at the market’s peak, but the subsequent pullback erased those profits and left many with substantial debt.
“Even though reckless, leveraged or margin trading is the only way to climb the broken ladder, at least by just a little,” said Kwon Soon‑kuk, a 34‑year‑old investor. The concentration of the market in two chipmakers—Samsung Electronics and SK Hynix, which together account for over 53% of the KOSPI’s value—exacerbated the volatility of the leveraged products.
Psychological toll and rising mental‑health needs
Beyond the financial losses, the fallout has manifested as a mental‑health crisis. Psychiatrist Park Jongsuk in Seoul reports that his daily caseload of stock‑related patients has risen from seven or eight to an average of eleven since June. Police in Busan also reported an attempted murder case involving a young man who blamed a YouTuber for his losses.
Popular finance YouTuber Jeon Suk‑jae, who runs a channel with 3.7 million subscribers, noted a shift in viewer comments from euphoria to gloom, mirroring the nation’s mood. “Many who entered the market may have suffered severe losses, and a majority could become so traumatised that they lose interest in investing altogether,” he said.
Government response and future outlook
The Blue House reiterated its commitment to market stability, while the Financial Services Commission said it had “comprehensively examined various risk factors at each stage.” Nonetheless, analysts warn that the heightened volatility may deter foreign investors and jeopardize the goal of achieving developed‑market status.
“Because volatility increased too much before corporate‑governance measures are fully established, it will be difficult to make long‑term investments for foreign investors,” said Huh Jae‑hwan of Eugene Investment Securities.
Some investors are now looking abroad, shifting to U.S. leveraged ETFs where demand remains strong. The Korean government has imposed new restrictions on individual participation in the high‑risk funds, but confidence among domestic traders remains shaken.
Broader implications
The episode highlights the tension between aggressive market‑modernisation policies and the need to protect ordinary families from speculative excess. As South Korea seeks to shed the “Korea Discount,” policymakers may need to balance innovation with safeguards that respect parental‑rights to financial security and the constitutional principle of protecting citizens from undue economic harm.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
