Korea's Finance Minister Apologized for the Stock Market

South Korea's finance minister stood before parliament and apologized for the stock market. Not for a crash he failed to prevent - for a financial product he approved.

That's not the way these things usually go. Ministers apologize after scandals. They don't typically apologize after a product launch. But the single-stock leveraged ETF that Korea's Financial Services Commission introduced on May 27 was, to borrow a word the reporting around it tends to use, an accident waiting for volume. It got volume. The Kospi - the Korean benchmark index - has now fallen roughly 40% from its June peak, erasing $2 trillion in market value. The people who put condolence wreaths outside the National Assembly in Seoul weren't complaining about a policy. They were complaining about a product, which is a much more unusual thing to do.

The basic point is that what happened to the Kospi this summer wasn't really a market crash in the traditional sense. It was a feedback loop that the government's own regulators built, handed to retail investors, and then watched do exactly what the math says it would do. The official label is "single-stock leveraged exchange-traded fund." The economic reality is closer to a daily-rebalancing buying obligation that turns any price move into a bigger one. On the way up, that's a bull market accelerator. On the way down, it's a forced-selling machine.

Here's how these products work, at least in simple terms. A two-times leveraged ETF promises to deliver twice the daily return of its target stock. To do that, it uses derivatives - futures or swaps - to borrow money and multiply the bet. But because the leverage has to be reset every day, the fund has to buy more of the underlying stock when the price rises and sell when it falls. So the fund isn't just riding the stock. It's trading it, every day, in a direction that reinforces whatever's already happening.

The fund managers say these products are a lower-cost hedging tool aimed at sophisticated traders. They come with disclaimers saying they're not suitable for buy-and-hold investors. The expense of maintaining the leveraged position means returns diverge substantially from the underlying stock over time. All of that is true. It's also true that the actual buyers, in Korea at least, weren't sophisticated traders. Data from KB Financial Group showed retail investors piled in with net purchases of 14 trillion won - about $9.7 billion - compared to roughly 2 trillion won from foreign investors. Retail accounted for something like 87% of the money going into these funds. The product was built for professionals. The people who bought it were what Reuters politely called young people, pensioners, and "mums and dads."

Leveraged ETFs aren't new. They've existed since the early 2000s. Single-stock leveraged ETFs launched in the United States in 2022. Hong Kong listed two-times leveraged funds tracking Samsung and SK Hynix in 2025, and their assets ballooned - the SK Hynix fund grew 20-fold before the peak. But Korea launched single-stock leveraged ETFs in May, and it did so with two stocks that together account for more than half of the Kospi's weighting and, on some days this year, more than 80% of the index's trading volume.

That concentration is the thing that made the Korean experiment go off the rails. When you have daily-rebalancing leveraged products flowing into two stocks that dominate an index's volume, the feedback loop doesn't just move the stock. It moves the index. The Kospi Volatility Index - which had spent decades comfortably below 30 - hit a record 97.99 on June 19 and has spent the past six weeks above 80. On May 18, volatility neared record highs after foreign investors dumped $13.2 billion in Korean equities in a single week. The Kospi briefly tumbled 4%, extending a 6% rout the prior session. Goldman Sachs described the Friday move as having "erased weekly gains." The exchange briefly halted some program trading after futures plunged 5%, triggering a mechanism called a "sidecar" - Korea's version of a circuit breaker. (It pauses automated trading for five minutes. It doesn't do much.)

Then the reversal hit, and the daily-rebalancing mechanism did what it does. As the underlying stocks fell, leveraged funds sold. That pushed the stocks lower. The funds rebalanced again, selling more. The Hong Kong-listed two-times leveraged ETF tracking SK Hynix - which had grown into the biggest fund of its type globally - plunged 83% over roughly a month from its June peak and still holds about $4 billion in assets. SK Hynix's stock halved from that same peak. Samsung came under pressure too. The market headed for its largest-ever monthly drop, despite Samsung and SK Hynix together reporting 150 trillion won - $100 billion - in quarterly profit.

That last detail is worth lingering on. The underlying businesses weren't collapsing. They were printing money. The sell-off wasn't driven by fundamentals. It was driven by a product structure that mechanically converts a price decline into selling pressure, regardless of whether the company is healthy. The leveraged ETF didn't care that SK Hynix had just announced enormous earnings. It cared that the stock price had fallen and the daily rebalance required more selling.

The government's response has been to cap individual investment into single-stock leveraged funds and raise their trading costs. Regulators banned promotional events and advised against new launches. That's sort of the equivalent of putting a speed bump on a highway and hoping the cars driving at 100 miles per hour slow down. A Citi Korea economist said the measures would "help ease volatility" but noted that a market stabilization fund - what he called a "liquidity put" - would have a bigger effect. An anonymous Seoul brokerage analyst was blunter: the cap was hastily announced without putting "proper thought" into it, and it won't affect existing investors or similar leveraged products listed in New York and Hong Kong.

Foreign investors, meanwhile, kept selling. They unloaded a net 18.5 trillion won - $13 billion - worth of stock in July alone. The dynamic is the one you'd expect once you understand the plumbing: foreigners were already selling into the May-June rally (they'd dumped $13.2 billion in equities in the week of mid-May; the same week saw about $17 billion pulled from emerging Asian markets excluding China, the second-largest weekly outflow on record, per Goldman Sachs). Leveraged retail money kept pushing prices up. Then the turn came, and the forced selling from the ETF rebalancing accelerated the drop that foreign selling had already started. It wasn't a simple story of retail greed followed by retail flight. It was a structure where foreign selling, retail leverage, and mechanical rebalancing reinforced each other.

The finance minister's apology is the detail that tells you how the political economy of this works. In South Korea, where retail investing has been treated as a form of financial inclusion - a way for ordinary citizens to participate in wealth creation - the government didn't just tolerate the leveraged ETF. It approved it, and by some accounts, cheered on the market while it was rising. When it reversed, the anger wasn't abstract. It was specific: 40 wreaths of condolence flowers on the sidewalk outside parliament, with ribbons that read "slaughtering retail investors" and "wait 'til pay back time, I will repay next time I vote." That's the sort of reaction you get when the state doesn't just regulate a market but actively introduces the product that breaks it.

The real question isn't whether retail investors should have been more careful. It's whether a government should hand daily-rebalancing leveraged products to a retail base that accounts for nearly 90% of the demand, on stocks that dominate the index's volume, without any structural limit on how much the mechanism can move the market. The answer the regulator has given so far is to raise the entry fee and cap new money. Existing leverage stays in place. The products that trade in Hong Kong and New York, which can create the same feedback loop, are untouched. The machine is still there.

South Korea's curbs on leveraged ETFs are like raising the minimum deposit at a casino and calling it responsible gambling.