"2x ETFs Not the Cause of KOSPI Crash"...The Real Culprit Shaking the Market Revealed

"AI Hype Suddenly Draws Global Investors’ Attention"

"Low Liquidity in Korean Market Makes It Vulnerable to Derivatives"

As the Korean stock market experiences a steep decline, there is a growing debate over whether individual leveraged Exchange-Traded Funds (ETFs), such as those for Samsung Electronics and SK hynix, are to blame. Amidst these discussions, a U.S. ETF expert has argued that the causes of the correction lie elsewhere, drawing considerable attention.

Eric Balchunas, a longtime Bloomberg market analyst and ETF expert, on July 29 (local time) shared an article on his X account detailing political debates surrounding the '2x leverage ETF' known as 'Zenic.' He stated, "Korean politicians are heavily criticizing 2x ETFs. But to be honest, the reason for the bubble and correction in the KOSPI this time is the artificial intelligence (AI) boom."

Bloomberg Exchange-Traded Funds (ETF) expert Eric Baltunas' post on X. Screenshot from X.

Balchunas explained, "It was the AI frenzy that sparked global interest in memory chip manufacturers," adding, "2x ETFs were simply one vehicle for global investors to gain access." In other words, the overheated stock prices were driven by a sudden surge in speculative demand from investors.

However, Balchunas also acknowledged that 2x ETFs can have negative side effects in markets like Korea. He pointed out, "The Korean market is characterized by relatively low liquidity," and warned that, "Instruments like 2x ETFs and other derivatives can allow the tail to easily wag the dog, potentially distorting the primary market."

Nevertheless, he emphasized, "Even those buying the tail ultimately desire the dog, so the core reason behind this correction is that global investors suddenly wanted exposure to memory semiconductors." Balchunas's comments make an analogy to the 'Wag the Dog' phenomenon frequently observed in stock markets, where derivatives (the "tail") influence the underlying spot prices (the "dog"). Normally, the price of derivatives should follow the spot market, but if the derivatives market overheats, the influence can reverse, with futures affecting spot prices.

Meanwhile, after the KOSPI dropped sharply for two straight days, falling to the 5,300 range during trading, the National Assembly’s Political Affairs Committee called for countermeasures on single-stock leverage ETFs. On that day, opposition parties raised strong criticism of introducing leveraged ETFs. Assemblyman Song Eon-seok of the People Power Party said, "There are many suspicions that single-stock leverage products were hastily pushed through to boost stock prices, and by extension, to help in the elections, without thorough review. With the mess in the stock market, the chairman of the Financial Services Commission owes the public a sincere apology."

This content was produced with the assistance of AI translation services.