Korea Exchange Considers Riskier ETFs to Attract Retail Investors

South Korea’s main bourse, the Korea Exchange, is considering lifting restrictions on high-risk leveraged exchange-traded products. The move aims to draw back retail investors, who have shown little interest in the domestic market despite a record 92% rise in the benchmark Kospi Index over the past year. The exchange is reviewing ways to relax rules that currently prohibit products offering three times or more exposure to an index.

Chief Executive Officer Jeong Eun Bo said the Korea Exchange is aligning with global standards to provide investors similar risk profiles both domestically and internationally. A rule change could come soon, as officials study ways to expand investment opportunities.

Retail investors in South Korea sold a net $18 billion of Kospi stocks in 2025, despite the index’s strong performance. Meanwhile, they poured $32.5 billion into U.S.-listed leveraged ETFs like TQQQ and SOXL, which track the Nasdaq-100 and chip stocks.

Why Did This Happen?

The Korea Exchange’s proposal reflects growing pressure from asset managers eager to offer more advanced investment tools. Jeong noted that domestic managers have consistently requested permission to launch such products. The shift is also motivated by a desire to reduce outflows to U.S. markets.

South Korean retail investors have increasingly favored U.S. stocks, driven by the won’s depreciation and higher returns in American equities. This trend has been a concern for authorities, who view it as a drain on the domestic market.

How Did Markets React?

The market response to the proposal has been cautious. While the Korea Exchange expects asset managers to move quickly once the rules change, it remains to be seen how retail investors will react. The move may attract more sophisticated traders, but it could also increase volatility.

The won has weakened significantly, hovering near 16-year lows against the dollar. Finance Minister Koo Yun-cheol warned that the government will not tolerate herd-like behavior in the foreign exchange market.

What Are Analysts Watching Next?

Analysts are closely monitoring whether the proposed rule changes will successfully reverse outflows and boost retail participation in the domestic market. There is also interest in how South Korea’s approach will align with U.S. and Hong Kong’s regulatory frameworks, where leveraged ETFs have seen strong adoption.

The Korea Exchange aims to implement the new framework as soon as possible. Jeong stated that he believes asset managers will quickly commercialize the products once the regulatory framework is in place.

Regulatory clarity is key. The government is working on a special fund for U.S. investment, but delays have been caused by uncertainty over U.S. court rulings on tariffs. These delays may affect the timeline for introducing new ETF products.

Investor sentiment remains cautious, given recent regulatory scrutiny and market volatility. BofA Securities recently lowered its price target for Coupang, citing regulatory concerns linked to a data breach. While not directly related to the ETF discussion, this example highlights broader investor caution in the Korean market.

The Korea Exchange’s proposal is part of a broader shift in financial policy, including plans to allow bitcoin ETFs and regulate stablecoins. These moves reflect a desire to modernize and diversify the Korean capital market.

Investors will be watching for clarity on the timeline for rule changes. The Korea Exchange has not yet provided a specific date for the new framework. Meanwhile, South Korea’s won continues to face depreciation pressure.