KOSPI's 22% July crash drives retail investors to flee Korean stocks

The KOSPI fell 22 percent in July, its steepest monthly decline since the global financial crisis, as retail investors who piled into leveraged bets on AI-linked semiconductor stocks fled the market.

"Retail investors' anger and criticism toward the government have reached a peak," said Jung Eui-jeong, head of the Korea Individual Investors Association.

Retail investors posted their largest-ever net selling of 8.284 trillion won on July 31 even as the index rebounded 18 percent that day. Circuit breakers halted KOSPI trading four times in July, a monthly record, after rarely being triggered before this year. Samsung Electronics fell 21 percent and SK Hynix dropped 35 percent last month, though both remain sharply higher from early 2025.

The exodus threatens to drain liquidity from a market where Samsung and SK Hynix account for more than half of KOSPI's market capitalization, and analysts expect tech and semiconductor stocks to stay volatile for months as deleveraging runs its course.

The July collapse followed months of what Bloomberg described as "KOSPI mania." President Lee Jae-myung's stock-market reform push and the launch of single-stock leveraged ETFs at the end of May drew a flood of retail money into the benchmark, with individual investors buying about 78 trillion won ($54.2 billion) of KOSPI stocks in May and June. Concentrated bets on Samsung and SK Hynix, the two memory-chip makers that together carry more than half the index's weight, rode the global AI investment boom.

The reversal was brutal. The KOSPI plunged 10.84 percent on July 28, triggering circuit breakers twice in a session, then fell about 6 percent the next day with another halt. Over the two sessions the index dropped a cumulative 16.2 percent, wiping out as much as $2.18 trillion in market value at one point. Thirty-day KOSPI volatility surged to 97.13 percent on July 31, the highest since 1990.

Individual investors who entered during the frenzy are nursing heavy losses. Kim Han-kyung, a Seoul resident in her 30s who bought Korean stocks for the first time in May, said she has "engraved two rules" in her mind: "First, do not invest in the Korean stock market. Second, adhere to the first principle." Lee Jung-min, 40, who borrowed 50 million won against his apartment to trade, accused the government of turning the stock market into a casino by introducing leveraged ETFs.

The single-stock leveraged ETFs, designed to expand retail investment options and curb capital outflows to similar overseas products, have instead drawn blame for magnifying the swings. "This is a classic case of what happens when one-sided trading meets leverage," said Lale Akoner, global market analyst at eToro. She expects tech and semiconductor stocks to remain volatile for several more months but cautioned against reading the correction as a collapse of the AI investment thesis.

Financial authorities paused new listings of single-stock leveraged ETFs in mid-July and raised the minimum margin for the products to 30 million won from 10 million won, effective July 31. Trading in the 16 affected ETFs fell to about 3 trillion won on the first day of the new rules, roughly a quarter of the prior session's 12.4 trillion won. The Financial Services Commission is also pushing to amend the Capital Markets Act to let regulators adjust leverage ratios and cap individual investment at about 20 percent of total positions during periods of abnormal volatility.

Many investors and market participants view the measures as too late. "The current situation presents significant challenges for the government," said Francis Tan, Asia chief strategist at Indosuez Wealth Management. Foreign investors, meanwhile, returned to the market, posting a record single-day net purchase of about 7.2 trillion won of KOSPI stocks on July 31, and Citigroup maintains a KOSPI target of 10,000 points.

The market turmoil has spilled into politics. President Lee Jae-myung's disapproval rating rose to 50.5 percent, a record since he took office, according to a Realmeter survey released Aug. 3, with the stock-market crash and leveraged-ETF controversy among the factors weighing on his support. Even if the KOSPI recovers, rebuilding retail trust will take longer than the rebound, analysts said. "The high volatility has always been a characteristic of the Korean stock market," Akoner said, "but the fear of missing out drove investors toward AI-related large-cap stocks and leveraged investments."

This article is for informational purposes only and does not constitute investment advice.