Bloomberg: Korea’s Kospi Rout Puts Lee Government on Alert as Leveraged ETF Policy Backfires

A leveraged exchange-traded fund policy introduced by President Lee Jae-myung’s government to energize the stock market is now being blamed for the recent Kospi selloff, Bloomberg reported, adding to the administration’s political burden.

On Aug. 3, Bloomberg said the government swung into emergency response mode after the Kospi slumped about 40% from its recent peak over the past month. Lee, who was traveling in South America, was briefed on market conditions and ordered officials to draw up countermeasures. Deputy Prime Minister and Finance Minister Koo Yun-cheol apologized at the National Assembly before convening an emergency economy and finance meeting. Bank of Korea Governor Shin Hyun-song and other top economic officials attended to discuss possible responses.

The government later announced measures restricting retail investors’ investments in leveraged ETFs. The Kospi jumped about 18% the following day, posting its biggest one-day gain on record.

Even so, concern remains that the policy backlash may continue. Retail investor Kim Dong-woo told Bloomberg the government had responded too late and that the damage had already been done.

The Kospi had climbed more than 50% this year, lifted by the boom in artificial intelligence-related investment, making it the best-performing major stock market. But it also logged 32 sessions over the same period in which it rose or fell by more than 5%, the highest volatility since the 1980s.

Bloomberg attributed part of that volatility to the government’s successive approvals of single-stock leveraged ETFs tied to Samsung Electronics Co. and SK Hynix Inc. The products use derivatives and borrowing to magnify daily returns, and in South Korea they are characterized by heavy participation from retail investors.

Jung Eui-jung, head of the Korea Stockholders Alliance, criticized the government, saying it was trying to clean up the situation even though it had created the “gambling table” itself.

The presidential office said the introduction of leveraged ETFs was intended to broaden investor choice and make products previously available only overseas tradable in the domestic market as well. It added that additional investor-protection measures are under review as market volatility increases.

The opposition also sharply criticized the policy. Park Soo-young, a People Power Party lawmaker on the National Assembly’s Strategy and Finance Committee, said such a rapid product launch would have been difficult without support from the presidential office. He said the government had turned Korea’s capital market into a casino bigger than Las Vegas.

Lee Yoon-soo, a professor of economics at Seoul National University, said products available overseas do not necessarily work the same way in the domestic market. If policymakers failed to fully account for local market characteristics and risks, he added, the policy could be judged a failure.