Korea AI Rout Revives Scrutiny of $290 Billion Levered-ETF Boom

South Korea experienced an AI-driven selloff this week, intensifying scrutiny on leveraged exchange-traded funds (ETFs), a rapidly expanding segment of retail investing. The decline, which saw the benchmark Kospi index fall by 3.8% in the past month, has been partly attributed to the unwinding of positions in AI-related stocks, which had previously seen significant inflows into leveraged ETFs. These products, designed to amplify daily returns, carry substantial risks, particularly in volatile markets. Analysts at Morgan Stanley noted that the rapid growth of leveraged ETFs, which now manage an estimated $290 billion globally, has outpaced the development of robust risk management frameworks. The Financial Times reported that retail investors, attracted by the potential for amplified gains, have increasingly turned to these complex instruments, often without fully understanding the magnified losses they can incur during market downturns. The recent volatility in South Korea serves as a stark reminder of the potential for these products to exacerbate market swings and pose systemic risks if not adequately regulated. Regulators worldwide are reportedly reviewing the oversight of leveraged ETFs, with a particular focus on investor protection and market stability. The Financial Supervisory Service in South Korea has indicated it will investigate the role of leveraged ETFs in the recent market movements.