After leading the global stock markets, South Korea sees “the largest capital outflow in history” from Korean ETFs.
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After global fund management institutions reduced their positions following the best-performing surge in the South Korean stock market, South Korean ETFs recorded their largest weekly capital outflow ever last week, revealing market divergence. Some investors still believe in the long-term logic of AI infrastructure investment.
BlackRock's nearly $23 billion iShares MSCI South Korea ETF saw a net outflow of $970 million last week, marking the largest weekly withdrawal in history. The Direxion Daily MSCI South Korea Bull 3X ETF, a triple-leverage product, also recorded a $240 million outflow during the same period.
These trends ended the strong capital inflow momentum into this Asian AI core market so far this year.
The Korea Composite Stock Price Index (Kospi) has risen more than 80% in USD terms this year, leading gains among major global indices, with stellar results from tech giants like Samsung Electronics serving as key drivers.
As profit-taking emerged, short-selling sentiment also increased—according to S3 Partners data, the short interest in iShares MSCI South Korea ETF rose to 14.81%, the highest since February 19.
Concentrated holdings trigger passive reduction
Behind the capital outflows, portfolio concentration is an important driving factor.
Malcolm Dorson, Senior Portfolio Manager at Global X Management Co., said: "Given the significant appreciation of Samsung and Korean assets, portfolio concentration has naturally increased, forcing some managers to sell."
He also pointed out that some managers have chosen to cash out ahead of the holiday season, following the "sell in May and go away" strategy.
This statement reveals two different selling motives: first is passive rebalancing, which is mandatory adjustment after holding weights exceed limits; second is active timing, locking in profits at high levels. Both together amplified the capital outflow last week.
Rise in short interest may serve as hedge rather than bearish bet
The change in short interest has also attracted market attention, but interpretation requires caution.
Tom Graff, Chief Investment Officer at Facet, believes that the recent jump in short interest for iShares MSCI South Korea ETF is more likely due to some investors using the ETF to hedge individual stock positions, rather than a broad bearish view of the entire Asian stock market.
"Given the previous surge, it’s not surprising that the market sees some degree of profit-taking," Graff said, but he added that the underlying logic supporting the rally, such as capital expenditure around AI infrastructure, "still has substantial tailwinds."
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