Korean Retail Investors "Moving from Seoul to Wall Street": Buying SK Hynix ADRs, Betting on Triple-Leveraged ETFs

Original author: Dong Jing

Source: Wallstreetcn

The violent turmoil in South Korea's 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 recorded net purchases of approximately $4.5 billion in U.S. stocks in July, a significant increase from June and close to the peak of $5 billion seen in January this year. Meanwhile, data from the Korea Exchange shows that for most of last week, South Korean retail investors continued to post net selling in domestic stocks, even as the benchmark index entered a technical bull market, while foreign investors reversed to net buying.

The most striking move in this capital outflow: South Korean investors spent approximately $840 million buying SK Hynix's American depositary receipts (ADRs) listed in the U.S., despite being able to buy shares of the same company directly at home. At the same time, the 3x leveraged semiconductor ETF SOXL topped the list of the most sought-after U.S. stock products among South Korean investors in July, with leveraged products occupying four of the top ten net-buy targets that month.

Analysts warn that this "switching venues without switching bets" strategy by South Korean retail investors not only fails to effectively diversify risk, but the prevalence of ADR premiums and leveraged products is a typical signal of speculative overheating that could create greater volatility in specific market segments.

Buying ADRs: A 10% Premium Still Triggers a Buying Frenzy, Experts Call It "Absolutely Insane"

Of the $4.5 billion in U.S. stocks net-purchased by South Korean investors in July, approximately $840 million flowed into SK Hynix's American depositary receipts, making them the second-largest U.S. security target for net buying by South Korean investors.

This behavior has puzzled market observers. Owen Lamont, senior vice president at Acadian Asset Management, noted that SK Hynix's ADRs recently traded at a premium of approximately 10% relative to the company's domestic shares, with higher volatility. Lamont said:

"This is absolutely insane. There is no reason for South Korean investors to buy ADRs of a South Korean stock."

Lamont said this price divergence is unusual and often a warning sign of speculative overheating. "This is a symptom of a bubble," he said, drawing parallels between this phenomenon and similar dislocations in ADRs of Indian companies during the dot-com bubble.

Leveraged Bets: 3x ETFs Lead the Pack, High-Risk Products Cluster

As South Korean investors flood into U.S. stocks, their preference for highly leveraged products is equally conspicuous.

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

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

Despite capital flowing from Seoul to Wall Street, multiple analysts point out that the core logic of South Korean retail investors has not changed.

Phillip Wool, head of research at Rayliant Global Advisors, said:

"Ironically, if you break down the data and look at what they're buying, most of it is still tied to the AI hardware theme—which is exactly the sector that has been hammered in the domestic market recently."

Jung In Yun, founder of Fibonacci Asset Management, believes that some traders who suffered losses in domestic semiconductor stocks or leveraged ETFs are rotating into U.S. AI stocks that they perceive as higher quality and more liquid.

"They aren't necessarily reducing their exposure to the AI theme; they may just be switching to a different geographic vehicle to express the same view."

Risk of Localized Distortion Greater Than Systemic Impact

Will the influx of South Korean capital have a material impact on the U.S. market? Analysts have differing views, but generally believe systemic risk is limited.

Wool sees limited risk. He points out that retail investors can have a disproportionately large influence in the South Korean market, but the U.S. market is dominated by professional institutions, and even relatively large inflows of South Korean capital are negligible relative to overall trading volume.

Lamont is more focused on the risk of localized distortion. He noted that South Korean investors had concentrated their buying in U.S. "quantum concept stocks" in late 2024, and warned that the large-scale proliferation of leveraged ETFs in South Korea, Hong Kong, and the U.S. "could be exacerbating volatility and amplifying market swings."

The departure of South Korean retail investors has deep roots in their domestic market.

Earlier, a strong rally drew retail investors heavily into semiconductor stocks and leveraged products, followed by a sharp market correction. According to data from the Korea Financial Investment Association, margin balances in the South Korean stock market stood at approximately 37 trillion won (about $26 billion) at the end of June, before plunging to 27 trillion won earlier this month—a new low for the year.

Lamont said the July U.S. stock buying was "strong" but not unprecedented, "but what's interesting is that they increased their buying of U.S. stocks precisely when their own market was crashing."