Key facts
- South Korea's KOSPI index has fallen 30% since its June peak.
- The government approved single-stock leveraged ETFs in May, requiring minimal training and a deposit.
- Retail investors' use of margin loans for KOSPI investment jumped to 30 trillion won by late June.
- An estimated $38.7 billion was lost by retail investors on leveraged ETFs.
- Demand for psychiatric treatment for stock-related distress has surged.
- New restrictions have been placed on individual investment in leveraged ETFs.
South Korea is grappling with the aftermath of a stock market mania that has led to significant investor losses and psychological trauma, potentially hindering the nation's progress towards developed market status. The KOSPI benchmark index plummeted 30% from its June peak, turning investor euphoria into despair and creating a political challenge for President Lee Jae Myung's government.
The surge was fueled by a push to eliminate the 'Korea Discount' by allowing bolder bets, including single-stock leveraged exchange-traded funds (ETFs) launched in May. These products, which use derivatives to multiply daily returns, were approved despite internal concerns about domestic investors' understanding of the risks. The only requirements were a short training course and a minimum deposit.
The timing coincided with a global AI boom, which propelled Korean memory chipmakers Samsung Electronics and SK Hynix to trillion-dollar valuations and ignited a domestic stock frenzy. Financial influencers and commentators amplified the obsession, with many retail investors, feeling excluded from the AI windfall, taking on debt and chasing quick profits through leveraged trading. Margin loans for KOSPI investment surged, reaching a record 29.8 trillion won by late June, driven by the country's wide wealth inequality.
Sentiment shifted in early July, leading to extreme market volatility. Analysts estimate retail investors lost $38.7 billion on leveraged ETFs, with some likening the speculative bets to the high-risk games in the Netflix drama 'Squid Game.' The fallout has been emotional, with a notable increase in demand for psychiatric help for stock-related distress. One incident involved a man arrested for attempted murder, who allegedly blamed a YouTuber for his stock losses.
In response, politicians have apologized, and authorities have imposed new restrictions on individual investment in leveraged ETFs. However, investor confidence remains shaken. Analysts suggest that the increased volatility may negatively impact foreign investor views of the South Korean market, potentially hindering the long-term goal of elevating the KOSPI to MSCI's developed market list, despite positive views on corporate governance reforms.