Korea's Leveraged ETF Mechanismic Sell-off Intensifies, KOSPI Plummets, Monthly Drawdown of 36%
Southern Eastern launched SK Hynix's double-leveraged product 7709 and Samsung Electronics' double-leveraged product 7747, with a total scale exceeding $30 billion. The daily automatic rebalancing mechanism triggers mechanical sell-offs during market declines.
The single product 7709 once exceeded $20 billion, becoming the world's largest single stock ETN leveraged product. The maximum management scale for SK Hynix-related products is about $23 billion, while Samsung-related products are about $8 billion, together accounting for over 50% of KOSPI's weight.
During declines, leveraged products must proportionally sell the underlying stocks, creating a negative feedback loop of "selling more as prices drop." A single sharp drop in SK Hynix-related leveraged funds can generate about $5 billion in mechanical sell-offs, with funds flowing from leveraged products to cash and inverse ETFs, putting pressure on the stock prices of Samsung and SK Hynix.
KOSPI fell from a high of 9385 points on June 19 to around 5600 points on July 28, a drawdown of about 36% over more than a month, with repeated circuit breakers and a maximum intraday drop exceeding 11%.
Source: Public Information
ABAB AI Insight
Historical Behavior
South Korea has played the role of a "warning bell" in previous global financial crises: during the 1997 Asian financial storm, the won depreciated sharply first; in 2000, the semiconductor sector peaked early during the internet bubble; in 2008, Korean stocks began to accelerate their decline ahead of the subprime mortgage crisis. The 2021 Archegos collapse (Bill Hwang leveraged through total return swaps) caused Credit Suisse to lose $5.5 billion, and the 2022 LUNA/UST collapse (designed by Do Kwon) wiped out a market value of $40 billion in days, followed by a series of failures including Three Arrows Capital, Celsius, and FTX. Korea has shifted from "passive warning" to "actively exporting risk."
Capital Pathways
Southern Eastern launched 7747 (Samsung double leverage) in May 2025 and 7709 (SK Hynix double leverage) in October 2025, using a swap synthetic replication strategy with daily closing resets. The original design of the product was to "meet the demand of Korean companies for uneven leverage rather than insufficient leverage," but the scale has spiraled out of control—product 7709 grew from $0 to $20 billion in just 8 months. The flow of funds is clear: retail and institutional investors increased their positions in semiconductors through leveraged ETFs, pushing KOSPI to a historical high of 9385 points, but during declines, leveraged products were forced to sell, creating a "high buy low sell automation" negative cycle.
Analogy + Industry Position
Similar cases: In 2020, leveraged ETFs in the US (such as SSO, SPXU) exacerbated market volatility during the pandemic crash in March, leading the SEC to subsequently limit the daily purchase cap for leveraged ETFs. In 2022, Japanese leveraged ETFs (such as 1570, 1578) also triggered mechanical sell-offs during the depreciation of the yen. Korea is currently in a "leveraged product out-of-control period"—compared to US stocks (where leveraged ETFs account for 5% of market trading volume) and Japanese stocks (3%), Korean stock leveraged ETFs accounted for a peak of 25% of KOSPI trading volume, concentrated in two products (7709, 7747), resulting in higher risk concentration.
Structural Judgment
Essentially, this is a transfer of pricing power caused by industrial chain restructuring. Traditional ETF pricing power lies with index compilers (MSCI, FTSE Russell), but the pricing power of leveraged ETFs lies with swap counterparties (investment banks like Goldman Sachs, JPMorgan, etc.). Southern Eastern transfers leveraged risk to investment banks through swap contracts, which then pass the risk to the market through Delta hedging. When the market declines, the hedging positions of investment banks combined with leveraged ETF sell-offs create a "double selling pressure," causing KOSPI's decline to far exceed fundamentals. This explains why the Korean finance minister publicly apologized—the government cannot intervene in the "marketized" leverage mechanism, but the systemic risk is borne by society as a whole.
ABAB News · Cognitive Laws
Leverage is an accelerator for rising markets and a circuit breaker for falling markets.
The essence of a warning bell is a risk-exporting country.
Financial innovation addresses unevenness but creates systemic risks.