New leveraged financial instruments tracking major South Korean semiconductor stocks are experiencing a sharp decline, putting retail investors who use these tools to chase magnified gains at risk of significant losses.

Data shows that more than a dozen leveraged exchange-traded funds tracking Samsung Electronics Co. and SK Hynix Inc. have seen their values nearly cut in half since their late May listings. The largest of these, the SAMSUNG KODEX SK Hynix Single Stock Leverage ETF with $3.4 billion in assets, has fallen approximately 45% from its debut and is down over 60% from its June high.

These losses underscore the dangers of leveraged bets on the two Korean chip giants, which are central to the global AI supply chain and have powered a leading rally in the nation's equity market. While such products can deliver outsized returns, they can also magnify volatility, as issuers typically must buy during upswings and sell during downturns to maintain promised leverage ratios.

"The steep drop in these leveraged ETFs has hit retail investors especially hard, as many seem to have viewed them as long-term holdings rather than short-term trading vehicles," said Jung In Yun, CEO of Fibonacci Asset Management. "Substantial losses in these funds could dampen retail investors' appetite and ability to purchase semiconductor shares, making any market rebound more reliant on foreign institutional buying."

Korean equities were mixed on Tuesday following a sharp sell-off the previous day, which saw shares of SK Hynix Inc. plummet a record 15% in Seoul on fears that the massive global AI stock rally had become overstretched.

Over a dozen single-stock leveraged ETFs launched in Seoul in late May with combined assets of $3 billion. The Korean products arrived after similar instruments in Hong Kong gained immense popularity. Since its October debut, the Hong Kong-listed CSOP SK Hynix Daily 2x Leveraged Product quickly grew to become the world's largest product of its type.

The volatility and losses linked to these ETFs have sparked criticism of Korean regulators' choice to permit them. The country had historically prohibited such products but reversed its stance during the market upswing to attract retail capital from overseas and support its currency. As the funds are increasingly cited as a source of market swings, the nation's top financial regulator last month expressed regret for approving their listings.

Nevertheless, indications suggest retail investor enthusiasm has not completely dissipated.

According to data, leveraged and inverse exchange-traded products in Korea drew $3.8 billion in inflows over the past month, mainly driven by single-stock funds tracking SK Hynix Inc. and Samsung Electronics Co..

"I anticipate regulators will strengthen investor safeguards rather than impose an outright ban on these products," Yun stated. "More rigorous suitability checks, enhanced risk disclosures, and improved investor education are probable measures."