Curbing Single-Stock Leverage Isn’t Enough; KOSPI 200 Concentration Needs a Fix

Nikkei caps individual stock weights at 10%

KOSPI 200 has no ceiling, worsening concentration

South Korea has tightened rules on single-stock leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. But market concern is growing that the bigger issue is concentration within the KOSPI 200 itself. The index is so heavily tilted toward the two chipmakers that investors can achieve nearly the same exposure through leveraged KOSPI 200 products even if single-stock leveraged bets are curbed.

Samsung Electronics accounts for about 33.1% of the KOSPI 200, while SK Hynix makes up 26.5%. Together, the two stocks represent 59.6% of the index. The third-largest component accounts for less than 3%. Although the benchmark consists of 200 stocks, in practice its moves are driven by the two semiconductor companies.

Major overseas indexes impose caps to prevent excessive concentration in individual names. Japan’s Nikkei 225 limits any single stock to a maximum weighting of 10%. The Nasdaq-100 caps individual stock weights at 24% and also restricts the combined weighting of stocks above 4.5% to no more than 48%. The NYSE 100 limits individual stock weights to 20%, while Russell indexes also apply stock-weight caps of about 20%.

The KOSPI 200, by contrast, has no separate cap on individual stock weightings. Because market capitalization is reflected directly in the index, concentration in Samsung Electronics and SK Hynix has intensified. As a result, investing in a leveraged KOSPI 200 ETF effectively amounts to a large bet on the two stocks.

Market participants say curbs on single-stock leveraged products alone will do little to reduce volatility. If investors shift instead into leveraged KOSPI 200 products, concentration in the two chipmakers would remain while rebalancing shocks could spread across the broader market. “Korea also needs to review measures to reduce the weightings of Samsung Electronics and SK Hynix in the KOSPI 200,” a financial investment industry official said.

Jeon Ye-jin, Hankyung.com reporter ace@hankyung.com