Korean Won Pressure From Index Rebalancing Has Ended, BofA Says

A significant source of mechanical selling pressure on the South Korean won has largely dissipated, according to an analysis from Bank of America. The bank's research indicates that forced outflows from global index funds, a key driver of won weakness, have now run their course.

Index-Driven Outflows Conclude

Bank of America (BofA) analysts reported that the systematic selling of Korean equities by index-tracking funds has faded to "roughly zero" following recent index reviews. This pressure stemmed from rules-based portfolio adjustments by global and passive investors.

The outflows were triggered by two primary factors:

• Benchmark Weighting Caps: Major constituents of the Korean market, such as Samsung and SK Hynix, grew so large that they exceeded index concentration limits, forcing passive funds to automatically trim their positions.
• Market Outperformance: Global funds rebalanced their portfolios by selling Korean assets after the market significantly outperformed the broader emerging markets benchmark. A subsequent correction has since erased Korea's "overweight" status.

Implications for the Korean Won

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The conclusion of this rules-based selling removes a major headwind for the Korean won, which was among the worst-performing currencies in 2026 before staging an 8% rally in July. With the mechanical drag gone, the currency's direction may be more influenced by other market fundamentals.

According to BofA, the primary remaining driver of potential outflows is now market volatility. The bank noted that the "final exodus leg" of fund outflows will likely depend on a stabilization of the VKOSPI, South Korea's main stock market volatility index.

Behind the Analysis

BofA's conclusion is based on a proprietary regression model designed to link these rules-based selling forces with currency movements and risk appetite. The model proved effective, capturing approximately one-third of the daily flow swings and tracking the year’s cumulative outflows to within about $5 billion, according to the report.