South Korea's stock market has generated substantial returns this year, but investors have faced unusually sharp price swings as the AI-driven chip rally reshapes the benchmark Kospi Index. Return volatility on the Kospi exceeded 60% as of July 20, nearly twice the level recorded by Japan's Nikkei 225 and even higher than Bitcoin's volatility over the same period. The Korea Exchange, South Korea's stock-market operator, activated its circuit-breaker mechanism seven times through mid-July to temporarily halt trading during severe market declines, compared with no such suspensions in 2025 and only one in 2024. Much of the volatility has centered on Samsung Electronics (SSNLF), a supplier of memory chips used in artificial intelligence systems, and SK Hynix (HXSCL), another producer of AI-related memory chips, as rapidly rising profits and share prices lifted their combined Kospi weighting above 50%. This concentration means investors buying funds that track the broader Korean market are increasingly gaining heavy exposure to two semiconductor companies and the global AI investment cycle.
The narrow structure of the rally may also be masking weakness across much of the market. When the Kospi closed at a record high in late June, more than 650 of its 831 constituent stocks declined, suggesting that gains in Samsung and SK Hynix were powerful enough to offset losses elsewhere. Leveraged exchange-traded funds have intensified the market's movements by using derivatives and borrowed money to amplify the daily returns of an underlying stock or index, typically by a factor of two. South Korean regulators allowed more than a dozen leveraged products linked to Samsung and SK Hynix to launch this year, with retail investors owning about 90% of them. Authorities announced on July 16 that new listings of single-stock leveraged products would be temporarily suspended as concerns increased over their destabilizing effect. The two chipmakers and the ETFs tracking them have recently accounted for more than 70% of daily traded value in South Korea's roughly $4 trillion market, while the leveraged products have fallen below their launch prices as the global AI trade has lost momentum.
Retail investors have added further support to the rally, pouring more than 100 trillion won, or approximately $67 billion, into Kospi shares this year. These inflows may help lower companies' cost of capital and support expansion plans, but they may also contribute to larger short-term stock-price movements. Foreign investors have moved in the opposite direction, selling about $108 billion of Kospi shares this year as fund managers reduced positions in Samsung and SK Hynix to avoid excessive portfolio concentration, including more than $40 billion of withdrawals from SK Hynix. Goldman Sachs Group, a global investment banking and asset-management firm, estimated in late June that assets invested in Korean leveraged ETFs had climbed above $40 billion from $5 billion at the beginning of the year and later identified these funds as the principal risk to monitor. Although margin debt has declined from its June peak, it remains substantially above the level recorded a year earlier. Gary Tan, a portfolio manager at Allspring Global Investments, said the role of leverage in the second-quarter rally in memory-chip stocks made him cautious about declaring that the sector had reached a bottom.