South Korea’s AI-fueled stock boom is turning into a cautionary tale of what happens when leverage becomes a more powerful market force than fundamentals.

SK Hynix Inc.’s record 15% plunge on Monday forced managers of leveraged products linked to the country’s chipmakers to sell billions of dollars worth of stock, turning what started as a global revaluation of AI valuations into a market rout. The selloff helped deepen a 25% slide in the Kospi in just three weeks, showing how margin loans, single-stock leveraged exchange-traded funds and concentrated index weightings can feed each other, widening swings in either direction.

The dynamics outside of Seoul are increasingly well-regarded. Korea sits at the center of the AI ​​hardware supply chain, with SK Hynix and Samsung Electronics Co. Makes up more than half of the Kospi index. Now that SK Hynix also trades via American depositary receipts in US time, investors say sentiment can bounce around the clock between Wall Street and Asia, raising the risk that Korea’s leverage-fueled volatility will go global.

That feedback loop played out on Wednesday as the Kospi index jumped more than 6%, buoyed by a rebound in SK Hynix shares following a 27% jump in its ADRs.

Hebe Chen, senior market analyst at Vantage Global Prime in Sydney, said South Korea’s “semiconductor story is built on real structural demand, but an unbridled appetite for leverage has stretched it into more fragile market trades.” “The double-edged sword is now cutting the other way – and leverage is making the fall as powerful as the climb.”

Single stock leveraged ETFs are relatively new to Asia. The CSOP SK Hynix Daily 2x leveraged product, listed in Hong Kong in October, quickly became the largest globally for its type. In Seoul, more than a dozen single-stock leveraged products tracking SK Hynix and Samsung debuted in late May, which typically return double their underlying shares. Together, they account for more than $14 billion in assets under management.

Leveraged ETFs had an amplifying effect on overall performance this week. Goldman Sachs Group Inc. for institutional clients. SK Hynix’s double-digit decline on Monday meant funds may have had to offload about $5 billion of shares in the company to rebalance their exposure to their mandates, according to a sales and trading desk note.

SK Hynix shares and stock futures accounted for about 18% of the combined total traded value that day, the note said.

This flow-driven trading, without any fundamental catalyst, can lead to heavy losses for local retail investors who tend to hold their holdings longer than the products are designed for. Data compiled by Bloomberg shows that prices of more than a dozen leveraged ETFs tracking the two memory chipmakers have fallen nearly 40% since they listed in Seoul in May.

Korean regulators now face the task of reining in this volatility without unduly disrupting the country’s financial markets. In a sign of possible future policy, the country’s top financial watchdog expressed regret for approving the listings last month.

Korean authorities are closely monitoring the impact of single-stock leveraged ETFs and will also discuss and decide whether additional measures are needed, presidential policy chief Kim Yong-beom told reporters last week.

“There’s not a huge amount they can do without disrupting the market structure, but there are expectations that there will be additional investor education, the limit on leverage and potentially the leverage limit will come down to 2 to 1.5 times,” said John Vihar, portfolio manager at Pictet Asset Management in Singapore. “It is important to note, however, that both Hong Kong and the US have leveraged ETFs that they do not have jurisdiction over.”

There is a risk that increased volatility caused by leveraged ETFs will trigger margin calls, leading to a selloff. The total amount of margin loans in Korea – or money borrowed to trade stocks – peaked at 38 trillion won ($25.4 billion) in June and was 34.8 trillion won as of Monday.

There is also a risk that the sell-off in New York sets the tone for Seoul, where leveraged ETFs and margin calls extend the move before feeding it back into the US session, creating a nearly 24-hour feedback loop.

“Whenever you have these kinds of speculative products, it always ends in tears when things change,” said Adil Ibrahim, group head of equities at Clay Group in Singapore.

“We are being forced to sell these leveraged ETFs low because the underlying is weak,” he said. “Nothing has changed in the fundamentals of the company.”