This year, the South Korean stock market has delivered remarkable gains driven by the AI chip boom, but it has also become the world's most volatile major equity market, with turbulence surpassing even that of Bitcoin, which is notorious for wild swings.

The benchmark Kospi index has recorded a volatility rate exceeding 60% in 2025, nearly double that of Japan's Nikkei 225 and even surpassing the high-risk cryptocurrency Bitcoin. By the end of July, severe market fluctuations had forced the Korea Exchange to trigger circuit breakers nine times this year to halt trading and curb flash-crash panic, compared to zero triggers in the full year of 2025 and just one in 2024.

In South Korea, retail investors are known as "ants," a term that reflects their tendency toward collective action: they are prone to panic selling when stocks fall and, driven by fear of missing out (FOMO), rush to buy at high prices when stocks rise. Although Wall Street institutions assess that recent forced liquidations have largely cleared highly leveraged capital from the market, the structural fragility of the South Korean stock market, due to extreme index concentration and the herd behavior of retail investors, continues to profoundly impact investors' risk exposure and trading strategies.

Two chip giants dominate the index

The roller-coaster ride of the South Korean stock market stems from the overwhelming dominance of Samsung Electronics and SK Hynix in the Kospi index. These two companies, which supply memory chips for next-generation AI systems, have seen explosive profit growth and rapidly rising share prices. Together with their respective listed affiliates, they account for over 50% of the Kospi's weight. This means that index funds tracking the Kospi have effectively become concentrated bets on the AI sector.

The distorting effect of this high concentration is clear: in late June, when the Kospi hit an all-time high, more than 650 of the index's 831 constituent stocks were actually declining.

The investment boom in AI infrastructure has been a direct driver of the two companies' soaring stock prices. Hundreds of billions of dollars are pouring into AI platforms and data center construction, betting that the transformative potential of this technology will eventually yield substantial returns. However, revenue generated from AI for end users currently does not cover construction costs, making related stock valuations highly sensitive to shifts in investor sentiment.

In late July, concerns that U.S. tech giants like Meta Platforms were overbuilding data centers, coupled with earnings that fell short of expectations, triggered a 27% plunge in SK Hynix's share price in just three trading days. The stock subsequently hit the 30% daily limit up, sparking a historic 18% rebound in the Kospi. Such extreme single-day volatility epitomizes the current market structure.

Leveraged ETFs amplify market moves

The explosive growth of South Korea's leveraged ETF market is another key factor in this volatility. Leveraged ETFs use derivatives and debt instruments to amplify the daily returns of an underlying index or asset, typically by a factor of two, posing significant risk. In most global markets, the primary buyers of these products are professional traders and institutional investors, but in South Korea, ordinary retail investors with limited financial training, using their savings, are the dominant holders.

The origins of South Korea's leveraged ETF market date back to 2010, when Samsung Asset Management launched the KODEX Leverage product, a 2x leveraged ETF tracking the KOSPI 200 index, which the company and South Korean media hailed as Asia's first leveraged ETF. For over a decade afterward, the market was largely confined to products tracking broad-based indices.

Regulators have not been blind to the risks. In 2025, South Korean financial authorities attempted to curb investor demand for overseas leveraged ETFs, but this year approved the launch of over a dozen leveraged ETF products tracking single stocks of Samsung Electronics and SK Hynix, with 90% of the shares now held by retail investors. According to a Goldman Sachs strategist's estimate in late June, the total assets under management of leveraged ETFs tracking indices and single stocks in South Korea has surged from about $5 billion at the start of the year to over $40 billion.

At their peak, these ETFs, together with the two chip stocks they track, contributed over 70% of the daily trading volume in this $3.4 trillion market, significantly amplifying the market impact of individual stock moves. Following the sharp sell-off in late July, the government pledged to take measures to limit retail exposure to leveraged ETFs, including setting caps on holdings as a percentage of an investor's total assets and raising transaction costs. According to a JPMorgan strategist's report on July 29, the deleveraging process for leveraged ETFs is largely complete, with hedge funds having finished about 90% of their deleveraging, and related margin buying volumes have also retreated from their June peak.

The battle between retail "ants" and foreign investors

Alongside the dominance of the two chip giants, there has been an unprecedented surge in retail investor participation in South Korea's market. This year, local individual investors have purchased over 110 trillion won (approximately $77 billion) worth of stocks on the Kospi. While this capital has lowered financing costs for the two companies and supported their expansion plans, it has also further amplified stock price volatility.

In stark contrast to the massive buying by retail investors, foreign investors have been consistently selling. Foreign fund managers, needing to compress their holdings of Samsung Electronics and SK Hynix to reasonable proportions to avoid excessive concentration, have net sold approximately $115 billion worth of Kospi stocks this year. Net foreign outflows from SK Hynix alone exceeded $40 billion.

In South Korea, retail investors are called "ants," a term that highlights their tendency for collective action: they easily panic-sell when stock prices fall, and often rush to buy at high prices when stocks rise, fearing they will miss out on gains. In contrast, institutional investors tend to hold their positions more steadfastly during corporate difficulties and have a clearer assessment of fundamental value. This structural difference is one of the deep-rooted causes of the persistent volatility in the South Korean market.