South Korea's benchmark Kospi index has witnessed extreme volatility this year. The index hit an all-time high in June before tumbling around 40% over the next six weeks.
Circuit breakers were triggered four times in July alone. A circuit breaker is an exchange-mandated trading halt that kicks in when an index falls sharply, interrupting panic selling and giving market participants time to reassess. On the Korea Exchange, an 8% drop halts all trading for 20 minutes.
The concentration was amplified by leverage. Leveraged exchange-traded funds (ETFs) use derivatives and borrowing to deliver a multiple of the daily return of an underlying stock or index. In late May, Korean asset managers listed 16 leveraged ETFs tracking Samsung and SK hynix alone, with retail investors accounting for a large share of the money invested.
A leveraged ETF has to buy more as the stock rises and sell as it falls to maintain its stated leverage. Once these funds become large relative to daily trading volumes, they stop merely tracking prices and begin influencing them. The mechanism fuelled gains during the rally—and intensified losses during the sell-off.
The reversal began in late June. Concerns that major US technology companies had overbuilt AI data centres, coupled with disappointing earnings, erased 27% of SK hynix's market value in just three trading sessions in late July, dragging Samsung lower as well. The potential for increased Chinese competition compounded the pressure. Falling prices triggered margin calls, accelerating forced selling. Because the two companies dominated the index, the broader market plunged with them.
MTF: India’s leverage tool
India does not permit leveraged ETFs, and the Securities and Exchange Board of India (Sebi) has not approved leveraged or inverse ETFs of the kind available in South Korea, Hong Kong or the US. However, investors can still use leverage through the margin trading facility (MTF), under which brokers lend money to buy stocks.
The combined MTF book crossed ₹1 trillion for the first time in September 2025.
MTF allows investors to purchase shares by paying only a portion of the transaction value upfront, with brokers funding the balance and charging daily interest. The initial margin can be met through cash or by pledging existing shares held in a demat account.
Exchange rules require investors to provide 20-50% of the purchase value as margin, implying leverage of roughly two to five times. Many brokers set higher margin requirements depending on the stock, typically offering two to four times leverage.
The biggest risk comes from margin calls. If the value of a funded position falls below the required threshold, investors must either add cash or pledge more securities. If the investor cannot meet the call in time, the broker steps in and sells the funded holdings to recover what is owed.
"Investors should understand the risks of leverage before getting into it," said Vishal Dhawan, founder of Plan Ahead Wealth Advisors. "Leverage changes the nature of the risk you are carrying. An unlevered investor in a falling market can choose to wait. A levered one may not get that choice, because the broker decides when the position closes."
Following the Korean market crash, Nithin Kamath, co-founder of Zerodha, said: "My biggest nightmare as a broker is what's happening in the Korean markets right now. The source of my nightmare is the way our MTF book has been growing along with the industry as a whole. In terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010," in a post on X.
He added that although MTF remains small relative to India's overall market capitalization, a sharp correction could trigger severe selling in small- and mid-cap stocks. Kamath also noted that a significant portion of MTF exposure is concentrated in stocks outside the futures and options segment, which can hit successive lower circuits during panic selling, leaving neither investors nor brokers with an opportunity to exit.
Hidden concentration
The second lesson is about understanding what ‘diversified’ actually means.
A Korean investor who bought a plain Kospi index fund in June 2026 was, in effect, putting more than half the money into two semiconductor companies serving the same end-market. The index was doing exactly what it was designed to do—track free-float market capitalization—but the outcome was a concentrated bet rather than a diversified portfolio.
Market-cap-weighted indices allocate more money to the largest companies, helping improve liquidity and making it easier for funds to track the benchmark efficiently. However, they also increase exposure to stocks that have already rallied the most, potentially creating concentration and valuation risks.
"Whether you are investing in domestic markets or international ones, understand what you are actually buying when you use passive funds," said Anish Teli, managing partner at QED Capital Advisors.
“Look at the factsheet or the index disclosures to understand the constituents, and get a sense of the sectoral biases. That tells you whether the index is dominated or heavily influenced by the fortunes of just a few sectors or as in the case of South Korea, by just two stocks.”
FOMO and narratives
The third lesson is behavioural.
In a widely circulated social media post, a Korean investor described saving for an apartment over 15 years, signing the purchase agreement and then deciding that leaving the remaining money idle for six months until the next instalment was due was a waste. Watching everyone else make money on Samsung Electronics made him feel like "the only fool left out," he wrote, adding that every day became agonizing.
He took a course on leverage and invested the money in two stocks. Early gains equalled a month's salary every other day. The position then lost more than half its value. He wrote that he can no longer get a loan approved and, even counting his severance pay, cannot make the instalment payment on the apartment.
Several similar accounts circulated through July.
"This episode has shown the risks of chasing narratives," said Dhawan. "A few months ago we saw a narrative play out in silver as it rallied sharply over the past year.”
Dhawan added that Korean investors also paid for a second, less obvious concentration.
“For many Korean retail investors, Korea was the only market they were invested in. When your entire equity exposure sits in a single country, a domestic shock leaves you with nowhere to hide. Geographic diversification is not about chasing higher returns elsewhere; it is about not having every part of your portfolio depend on the same set of events.”
Key takeaway
The volatility of Korean markets is a reminder for investors to stick to the basics of investing. As Dhawan pointed out, even if basics were kept in mind like asset allocation, diversification, re-balancing, it would have possibly helped several investors to reduce the impact of the crash.
“A re-balancing framework within a well-diversified portfolio of different asset classes, would have nudged an investor to re-balance portfolio and trim exposure to Korean equities when market rally would have lopsided the portfolio towards Korean markets,” Dhawan said.
Investors should therefore ensure that their portfolios are not overly dependent on the fortunes of a handful of stocks, sectors, investment styles or even fund managers. As Nobel laureate Harry Markowitz famously observed, diversification is the only free lunch in investing.