The High Volatility Behind the Korean Stock Market - Rapid Expansion of Leveraged ETFs

In the previous discussion about the Korean stock market, the focus was on the KOSPI and KOSPI VIX. The KOSPI continues to rise, but the KOSPI VIX is also at a high level, indicating that this round of gains in the Korean stock market is not stable; as the index rises, market volatility (risk) is also increasing.

At that time, a data point was mentioned: although the balance of retail financing in Korea is at a historic high, the proportion of financing to free-floating market value is only around 0.8%, so looking at the financing accounts alone, the Korean market has not yet reached the stage of relative leverage being extremely crowded as it did in the past.

Today, another set of data is added: the scale and exposure of leveraged ETFs in Korea have risen very rapidly and are projected to continue increasing in 2026.

According to data from EPFR and Goldman Sachs, the AUM of leveraged ETFs in Korea has grown to about 45 billion USD, which includes both domestically registered leveraged ETFs and overseas registered Korean-related leveraged ETFs.

More importantly, the total exposure of leveraged ETFs as a proportion of Korea's free-floating market value has rapidly risen from around 0.7% during most of 2025 to approximately 2.5% to 3%.

Previously, we observed that the proportion of direct financing by retail investors to buy stocks in Korea was only about 0.8%. It seemed that the relative leverage pressure was not extreme, but if we include leveraged ETFs, the leverage exposure in the market has significantly increased, and the rate of increase this year has been very fast.

It can be understood that leverage in the Korean stock market is not only present in financing accounts but also in ETF products.

Financing accounts represent retail investors directly borrowing money to buy stocks, while leveraged ETFs represent investors indirectly leveraging through the products. The former's proportion of free-floating market value is not considered extreme, while the latter's exposure has already risen to around 2.5% to 3%, which will make the market's ups and downs more easily amplified.

Additionally, leveraged ETFs have another characteristic: they typically require daily rebalancing. When the market rises, to maintain the target leverage, the product may need to increase exposure; when the market falls, it may need to reduce exposure. This mechanism inherently makes the market more prone to chasing gains when rising and amplifying downward pressure when falling.

This also explains why the Korean stock market experiences a combination of rising indices alongside rising volatility. It also indicates that the Korean market has entered a stage of high heat, high leverage product participation, and coexistence of high volatility.

In simpler terms, Koreans are borrowing money from brokers to invest in stocks; it seems that they have not yet reached their ceiling, but many people are already buying leveraged ETFs, which means they do not need to borrow so much money themselves, as the products have already added a layer of leverage for them.

It's like in the cryptocurrency world, where one borrows money to trade cryptocurrencies. The borrowed amount may not be fully maxed out, but what is being purchased has already transformed from ordinary bitcoin:native to two or three times leveraged BTC. On the surface, it appears the loans aren't that high, but the actual position has become much heavier.

As a result, the upward movement indeed surges faster, but the downward movement also strikes harder, which is why the Korean stock market exhibits the sensation of significant gains one day and significant losses the next.

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