Korean Investors Shift to U.S. Market Amid Domestic Corrections

As global investors are making waves, a notable trend is emerging: an increasing number of South Korean investors are turning their attention to the U.S. markets, perhaps as a strategy to sidestep corrections at home. Despite the South Korean benchmark indexes entering a bull market, local retail investors chose to sell off their domestic stocks extensively throughout last week, according to data from the Korea Exchange. Interestingly, overseas investors shifted to become net buyers during the same period.

Investment in ADRs

In July, South Korean investors poured approximately $4.5 billion into U.S. stocks, with around $840 million specifically invested in U.S.-listed depositary receipts (ADRs) of semiconductor companies. This investment behavior, even when direct purchases domestically are available, resulted in SK Hynix’s ADRs being ranked as the second most bought U.S. stock. Owen Lamont, a senior vice president at Acadian Asset Management, mentioned that U.S. receipts have been trading at a premium—about 10%—over their South Korean counterparts, and volatility has certainly spiked.

“It’s absolutely crazy,” Lamont commented regarding the demand for SK Hynix’s U.S.-listed shares. He noted that generally, there’s no clear rationale for Korean investors to opt for ADRs of domestic stocks. Such pricing anomalies could indicate potential excessive speculation, akin to patterns observed during the dot-com boom in Taiwan and India.

Leveraged Products Gain Popularity

Leveraged investments have also caught the eye of South Korean traders. Among the most popular U.S. stocks this month is ProShares Ultra QQQETF, making it into the top ten. Data indicates that four of July’s most-overbought U.S. stocks were leveraged products, with the Direxion Daily Semiconductor Bull 3X Stock ETF (SOXL) leading the pack, aiming to triple the daily performance of the semiconductor index. Other leveraged ETFs, ProShares UltraPro QQQ and ProShares Ultra QQQ, ranked fourth and sixth, respectively.

Consistent Investment Themes

While investors in South Korea might be diversifying their geographical focus, there appears to be a continued interest in similar themes. Philip Uhl, head of research at Rayliant Global Advisors, noted that the buying patterns reveal a preference for stocks connected to AI hardware, even as many of these stocks are also selling in the local market. Chung In-yoon from Fibonacci Asset Management mentioned that some investors who faced losses in the Korean semiconductor sector are now gravitating toward U.S. AI stocks, presumably viewing them as more robust and liquid options.

Change from Previous Month

Last month, South Korean retail investors’ enthusiasm for the U.S. market was evident with net purchases reaching around $4.5 billion, marking a significant rise from June and nearing January’s peaks of $5 billion. Meanwhile, after a steep decline, the domestic stock market began recovering this month, following an earlier surge that had attracted retail investors to semiconductors and leveraged products. Notably, the Korea Financial Investment Association observed a decline in outstanding margin from about 37 trillion won ($26 billion) at June’s end to 27 trillion won, the lowest this year, at the start of this month. Lamont described July’s transactions as “strong” but not unexpected. It’s intriguing, though, to see U.S. purchases increase amid a downturn in the Korean market.

Impact on the Market

The question remains whether the influx of Korean capital can significantly heighten overall volatility within the much larger U.S. market. Analysts suggest that the risk remains relatively low since, although retail investors can cause notable ripples in South Korea, the U.S. market is largely influenced by professional and institutional players. As such, even considerable inflows from Korea may not substantially impact overall trading volumes.

However, Lamont indicated that there’s potential for distortion in specific stocks and market segments favored by retail traders. He recalled the instance of South Korean investors flocking to “quantum” stocks in the U.S. at the end of 2024, noting that the prevalence of leveraged ETFs in South Korea, Hong Kong, and the U.S. might be exacerbating market fluctuations.