At The Half: Where Global Capital Is Moving and the ETF Strategies Ahead

💡The increased market volatility in South Korea in the first half of 2026 was caused by the explosive growth in assets under management for single-stock leveraged ETFs, particularly those tied to Samsung Electronics and SK Hynix. This surge led to six market-wide circuit breaker activations in the KOSPI during the first half of 2026, out of only 12 historical occurrences, highlighting the amplifying effect of these products' procyclical trading mechanisms on price movements and market concentration.

💡In early 2026, capital flows shifted away from US equities, which lagged global benchmarks for the second consecutive year with a 9.9% gain compared to the MSCI ACWI's 11.2%. This capital became increasingly diversified across other regions, primarily benefiting emerging markets, with the iShares MSCI Emerging Markets ETF (EEM) surging approximately 23.8%, indicating a broader global equity diversification trend.

💡Taiwan and China significantly influenced the MSCI Emerging Markets ETF (EEM) composition. Over the past five years, China's weighting in EEM fell by approximately 12.5 percentage points to around 19%, while Taiwan's weighting increased to about 27.3%, making it the largest country allocation in the index. This shift transformed EEM's investment profile from one focused on China's growth or India's domestic demand to an Asia-focused technology hardware and semiconductor supply chain ETF.

💡The current performance of the MSCI Emerging Markets ETF (EEM) is driven primarily by the AI capital expenditure cycle, semiconductor industry conditions, and demand for large-scale technology hardware. Its investment profile has reshaped to increasingly resemble an Asia-focused technology hardware and semiconductor supply chain ETF, moving away from traditional emerging market narratives of demographic growth and consumption upgrades, particularly given Taiwan's increased weighting to 27.3%.

💡A structural shift occurred within the technology sector where capital expenditures among major cloud providers expanded rapidly, leading to a noticeable decline in their combined free cash flow. Simultaneously, suppliers of critical data center components and hardware experienced explosive free cash flow growth, indicating that AI spending is increasingly shifting from cloud hyperscalers to

💡Free cash flow and quality ETFs outperformed in the first half of 2026 due to investors' increasing preference for companies that have translated AI demand into tangible earnings and cash flow, particularly hardware, equipment, and infrastructure suppliers. Amid rising market volatility and concerns over technology giants' capital spending, quality ETFs, characterized by high ROE and low leverage, offered downside resilience and continued participation in economic expansion.

💡According to Nomura Securities, single-stock leveraged ETFs amplify market volatility through their daily rebalancing mechanism. To maintain a constant leverage ratio, these ETFs must buy more after prices rise and sell after prices fall, reinforcing existing market trends through procyclical trading. Every 1% move in the underlying assets may require approximately $9 billion in rebalancing transactions, which, during periods of elevated volatility and declining liquidity, can significantly amplify price movements.

💡South Korean regulators identify significant risks with the boom in single-stock leveraged ETFs, including the amplification of market volatility due to their procyclical trading mechanisms and an increase in the structural concentration of the Korean equity market in a small number of semiconductor heavyweights. FSS Governor Lee Chan-jin expressed deep regret over approving these ETFs, following six market-wide circuit breaker activations in the KOSPI during the first half of 2026 alone.

💡Leveraged ETFs are generally not suitable for long-term investment portfolios because they rely on daily compounding and daily rebalancing. During prolonged periods of sharp market declines, they can experience severe volatility drag, making it difficult for subsequent rebounds to fully recover previous losses. An extreme historical simulation showed that a 3x leveraged Nasdaq 100 strategy initiated in 2000 would still likely trail the unleveraged index after 26 years due to these compounding effects.

💡MacroMicro recommends three updated investment strategies for the second half of 2026: 1) Prefer equities over bonds, with greater exposure to the US, Taiwan, and Japan through global diversification; 2) Maintain a 10% to 15% allocation to precious metals, viewing corrections as buying opportunities; and 3) Emphasize stock selection and cash flow within technology, increasing allocations to companies with strong free cash flow (e.g., GFLW) and high quality (e.g., SPHQ) to manage valuation risk and avoid excessive leverage.