What's driving Korean retail investors to bet everything on US stocks?

By Lee Yeon-woo

During the Lunar New Year holiday last month, Kim made a bold bet. He purchased exchange-traded funds (ETFs) that track the ICE Semiconductor Index at three times leverage.

Gains are tripled, but so are losses. The timing couldn’t have been worse. This happened at a time when almost all U.S. semiconductor-related stocks plunged following the rise of Chinese AI startup DeepSeek.

"I saw that rather as an opportunity. You will never earn if you only try to play it safe," the 32-year-old office worker told The Korea Times.

Kim sold his shares as soon as the price showed signs of a slight rebound. Within a few days, he earned about 3 million won ($2,067).

Kim was not the only Korean who made a strong bet on the ETFs. Other retail investors also participated, net purchasing over $378 million — the largest amount in their total net purchases during the holiday period. Koreans now account for 19 percent of the ICE semiconductor ETF's total holdings.

This pattern underscores a larger movement among Korean investors, who are increasingly making bold investments in the U.S. market. Beyond well-known large-cap stocks like Amazon and Meta, they are also actively investing in mid- and small-cap stocks, as well as leveraged ETFs.

According to the Korea Capital Market Institute (KCMI), 12 percent of individual investors' total stock holdings as of June 2024 were classified as high-risk, including some investments that are not even permissible here due to investor protection rules. The figure marks a significant surge from below 1 percent in 2020.

Why are they taking on such risks? They say it's the promise of profit.

"No matter how much potential a company has, I have never succeeded in earning long-term profits in Korea," said Choi Seung-ho, a 36-year-old office worker.

He decided he was done with the Korean stock market when President Yoon Suk Yeol declared martial law on Dec. 3. As soon as the market opened the next day, he sold all his domestic shares and transferred them to the U.S.

"Look at this martial law incident. It happened while the government was promoting the Corporate Value-up Program. This is a total betrayal. Now I understand the meme, ‘Escaping from the domestic market is an act of intelligence,’" Choi said.

One stock favored by Korean retail investors is IonQ, a U.S. mid-cap stock in the quantum computing sector. As of January, Korean investors held its shares worth $2.5 billion, making up nearly 29.7 percent of its market cap. With quantum computing emerging as a promising industry, IonQ’s stock surged 237 percent last year.

Similarly, in the small modular reactor sector, NuScale Power had an 8.5 percent ownership stake held by Korean investors, with its stock delivering an impressive 445 percent return in 2024.

While the results were driven by strong growth trends in the U.S. market, this led investors to believe that if they invest at the right time and choose the right stocks — however risky — they could gain significant profits. Greater access to overseas investments and lower transaction costs offered by securities firms compared to other major economies further fueled this trend.

Meanwhile, the Korean market continues to lag behind global peers.

According to J.P. Morgan, the MSCI Korea Index posted a mere 1.9 percent average annual gain from 2012 to 2022. Not only it was the second-weakest after ASEAN, it also exhibited some of the highest volatility. In contrast, the U.S. recorded the highest annual return at 12.6 percent, followed by Taiwan and India, all with significantly lower volatility.

"The structure of the Korean market has become fundamentally skewed toward short-term investing," Park Young-ok, a retired fund manager, wrote in his recent book "Without Shareholder Rights." In 2015, his investments in Korean stocks were worth more than 200 billion won.

"The Korean capital market is dominated by companies with controlling shareholders, and repeated practices aimed at maximizing their interests have fueled investor distrust," Park said.

Experts warn that a heavy focus on a few select stocks poses investment risks. Leveraged ETFs, in particular, experience extreme volatility, making them a challenge for ordinary investors to manage.

"Recently, investment in U.S. tech stocks has grown significantly, with a highly concentrated focus on a select few stocks," KCMI research fellow Kim Han-soo said. "This indicates that investors are not fully utilizing the primary advantage of portfolio diversification, which maximizes risk-adjusted returns through proper risk dispersion."

The shift could have lasting consequences for the Korean economy as well. Continued capital outflows will make it increasingly difficult for companies to raise funds, potentially stifling new business opportunities and growth.

"In a rapidly changing technological landscape and shifting global dynamics, securing investment capital is more crucial than ever," Park said. "The easiest and most effective way to achieve this is by encouraging domestic investors to participate in the local stock market. This is why retaining retail investors is imperative."