"Too crazy!" Korean retail investors "move from Seoul to Wall Street": buying SK Hynix ADRs and betting on triple leveraged ETFs

The intense volatility in the South Korean domestic stock market is pushing a large number of retail investors toward the U.S. market—but they are still betting on the same AI theme.

According to data from the Korea Securities Depository, South Korean investors had a net purchase of about $4.5 billion in U.S. stocks in July, a sharp rise from June and close to the January peak of $5 billion this year. At the same time, according to data from the Korea Exchange, throughout most of last week, Korean retail investors continued to be net sellers of domestic stocks, even though the benchmark index had entered a technical bull market, while overseas investors reversed course and became net buyers.

The most eye-catching move in this capital outflow: South Korean investors spent about $840 million buying SK hynix's American Depositary Receipts (ADR), even though they could have bought shares of the same company directly in Korea. Meanwhile, the triple-leveraged semiconductor ETF SOXL was the most favored U.S. stock product among Korean investors in July, and leveraged products made up four of the top ten net purchases that month.

Analysts warn that this operation of "switching markets but not themes" by South Korean retail investors not only fails to effectively diversify risks, but the prevalence of ADR premiums and leveraged products is a classic sign of overheated speculation, which could cause even bigger volatility in local markets.

Buying ADRs: A 10% premium is still not enough to stop the frenzy—experts say "too crazy"

Of the $4.5 billion in U.S. stocks South Korean investors purchased net in July, about $840 million went to SK hynix ADRs, making it the second most heavily net bought U.S. security by Korean investors.

This behavior has left market watchers puzzled. Owen Lamont, Senior Vice President at Acadian Asset Management, pointed out that SK hynix's ADRs have recently traded at about a 10% premium over the local Korean shares and are even more volatile. Lamont said:

"This is absolutely crazy. Korean investors have no reason at all to buy the U.S. ADRs of a Korean stock."

Lamont stated that such price discrepancies are not common and are often a warning signal of overheated speculation. "This is a symptom of a bubble," he said, likening this phenomenon to similar dislocations with Indian company ADRs during the Internet bubble era.

Leveraged bets: 3x ETFs lead, high-risk products cluster

As Korean investors flood into U.S. stocks, their penchant for high-leverage products is equally noteworthy.

According to data from the Korea Securities Depository, four of the top ten net purchased U.S. stocks in July were leveraged products. Among them, Direxion Daily Semiconductor Bull 3X Shares ETF topped the list—this product aims to track three times the daily movements of the semiconductor index. ProShares UltraPro QQQ and ProShares Ultra QQQ ranked fourth and sixth, respectively.

So far this month, ProShares Ultra QQQ ETF also entered the top ten most popular U.S. stocks among Korean investors, ranking seventh.

Although funds are flowing from Seoul to Wall Street, several analysts point out that, the core logic of Korean retail investors has not changed.

Phillip Wool, Director of Research at Rayliant Global Advisors, stated:

"Ironically, if you break down the data and look at what they're buying, you'll see that most of it is still stocks related to the AI hardware theme—the very sector that crashed recently in the domestic market."

Jung In Yun, founder of Fibonacci Asset Management, believes that some traders who suffered losses in Korean semiconductor stocks or leveraged ETFs are turning to what they see as higher quality and more liquid U.S. AI stocks.

"They're not necessarily reducing their exposure to the AI theme—they may just be expressing the same view in a different geographic vehicle."

Partial distortions pose greater risk than systemic shocks

Will the influx of Korean capital actually have a substantial impact on the U.S. market? Analysts have mixed views, but the consensus is that systemic risk is limited.

Wool believes the risks are minimal. He notes that, while retail investors can wield outsized influence in the Korean market, the U.S. market is dominated by professional institutions—so even large inflows of South Korean capital are negligible relative to the overall trading volume.

Lamont, in contrast, is more focused on the risks of localized distortions. He observed that Korean investors had also rushed into "quantum concept stocks" in the U.S. toward the end of 2024, warning that the widespread proliferation of leveraged ETFs in Korea, Hong Kong, and the U.S. "may be exacerbating volatility and amplifying market swings."

This round of departure by South Korean retail investors is deeply rooted in the context of their domestic market.

Previously, a strong rally drew retail investors into semiconductor stocks and leveraged products, which was followed by a sharp market pullback. According to the Korea Financial Investment Association, margin balances in the Korean stock market fell from around 37 trillion won (about $26 billion) at the end of June to 27 trillion won earlier this month, a new low for the year.

Lamont notes that although July's buying in U.S. stocks was "strong," it was not unprecedented. "But what's interesting," he says, "is that they've increased their buying of U.S. stocks just as the Korean market has plunged."