(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, July 20 (Reuters) - The intense volatility

rocking South Korea's chip-heavy stock market has come to

America, but Wall Street has suffered only modest losses in

response. Can this continue, or will the slump in semiconductors

and vulnerability among highly leveraged investors cause serious

damage in the U.S. as well?

The benchmark KOSPI index - heavily concentrated in

firms benefiting from the artificial intelligence boom, most

notably the trillion-dollar megacaps Samsung and SK

Hynix ( SKHY ) - is down more than 30% from its peak only a

month ago, and volatility has soared. Daily moves of 4% or more

are now regular occurrences, and 30-day realized volatility has

exploded to the highest since 1998.

Regulators in Seoul have ramped up efforts to curb these

wild swings in equity prices, which appear to be fueled, in

part, by heavily leveraged retail investors using

exchange-traded funds (ETFs). These "mom and pop" investors were

pulled in by the extraordinary AI boom, and many have been

caught out by the rapid snapback.

Most longer-term buyers are still sitting on substantial

gains, of course, with the KOSPI still up 55% this year,

following an annual gain of 75% last year. But the same cannot

be said of short-term punters.

According to Goldman Sachs, more than 1.2 million leveraged

retail trading accounts in South Korea triggered margin calls as

of July 13, with an estimated 320,000-360,000 accounts fully

liquidated. Goldman's strategists reckon this means around one

in 30 adults in the country, or 3.4% of the adult population,

have received margin calls.

That could have a meaningful impact on Korea's economy more

widely. If many South Korean households are now sitting on

losses, that could weigh on the country's economy moving

forward.

Given rising retail participation in U.S. stocks, exposure

to the AI theme, and the rising popularity of leveraged

vehicles, could Wall Street - and the broader U.S. economy - be

in trouble as well?

ETF BOOM

The use of leveraged ETFs has exploded in the U.S. in recent

years too. These products use futures or swaps to ​replicate

bets with borrowed money, multiplying returns by typically two,

three or even five times. But they magnify ​losses as well. U.S.

assets under management in these ETFs have reached a record $218

billion, up 60% since the end of March alone, according to Scott

Rubner at Citadel Securities.

Leverage tied to technology ETFs has grown a whopping 136%

over the same period, while leverage linked to semiconductor

exposure has nearly tripled. Combined, tech and semis now

account for 67% of all leveraged ETF assets under management.

Until recently, this was a boon for U.S. markets, which have

benefitted hugely from the outperformance of chips, AI and tech.

As Rubner notes, some 19 cents of every dollar allocated to the

S&P 500 is directed toward semiconductor companies, with 33

cents going to the 'Magnificent 7' megacaps and nearly 40 cents

to the index's ten largest holdings, most of which are tech

firms.

Put all this together, and you get a "concentration of

speculation" that magnifies the potential for a heavy drawdown

when sentiment turns, says Bob Elliott at Unlimited.

"It's just leverage working in reverse. Everyone loves it on

the way up, but not so much on the way down," he says, adding

that he sees a "pretty high chance" of broader asset prices

getting dragged down.

GOLDI-SOX AND THE BEARS

It's worth noting that the value of assets under management

in leveraged ETFs represents less than 1% of total ETF and

mutual fund assets, according to Goldman Sachs. But the

direction of travel is clear.

Since 2021, the retail share of U.S. trading volumes in

leveraged index ETFs has been roughly double the share for those

tracking the same indices without leverage. And margin balances

- the amount borrowed by retail investors from brokers to buy

stocks - at retail investment firms Interactive Brokers,

Robinhood, and Charles Schwab rose to 1.8% of customer assets

earlier this year, a new record.

If you zoom out to all brokerage firms registered with the

Financial Industry Regulatory Authority, margin balances rose to

$1.3 trillion earlier this year, or 52% of gross customer

balances, according to Goldman. That's the highest share on

record, and 6 percentage points above the previous record high

set in 1998, although it includes institutional money and

borrowing to fund short positions as well.

The chip selloff will be putting these positions under

pressure. While the S&P 500 and Nasdaq are only

2% and 7% off their June peaks, respectively, the 'SOX'

semiconductor index is 25% below its recent high. That

means it's technically in a bear market, and 30-day realized

volatility is the highest since 2003.

Retail and leveraged investors - not to mention the broader

market - could be in for a tough few weeks. While there's little

risk that these juiced tech bets could lead to a financial

crisis or systemic issue on Wall Street, given the depth and

diversification of U.S. markets, there's still enough smoldering

tinder for investors to get burned.

(The opinions expressed here are those of the author, a

columnist for Reuters)

Enjoying this column? Check out Reuters Open Interest (ROI),

your essential new source for global financial commentary.

Follow ROI on LinkedIn, and X.

And listen to the Morning Bid daily podcast on Apple,

Spotify, or the Reuters app. Subscribe to hear Reuters

journalists discuss the biggest news in markets and finance

seven days a week.

(By Jamie McGeever

Editing by Chizu Nomiyama )