Is Leveraged Capital Hijacking the AI Rally? Related ETF Exposure Has Climbed to 58%, Rebalancing May Intensify Tech Stock Volatility

Leveraged ETFs are becoming a non-negligible hidden force in the AI rally.

The latest analysis from Bloomberg News shows that the exposure of bullish leveraged ETFs to AI-related stocks has climbed from 26% in 2022 to 58%, with just 10 companies accounting for two-thirds of this exposure, highly concentrated in names such as Nvidia, SK Hynix, and Micron Tech.

The risks of this trend are no longer limited to investors in the leveraged products themselves. The recent severe turbulence in the South Korean stock market serves as a cautionary tale—leveraged ETFs tracking SK Hynix and Samsung Electronics accounted for up to 70% of the total daily trading volume on the Seoul market at their peak, with the volatility of the benchmark Kospi index even surpassing that of Bitcoin. Nikolaos Panigirtzoglou, a strategist at JPMorgan, stated that given the heavy tilt of these products toward tech stocks, "leveraged equity ETFs will continue to generate large-scale rebalancing cash flows and push up tech stock volatility."

Currently, global leveraged ETF assets total approximately $250 billion. Although this represents only a small fraction of the more than $22 trillion in global ETF assets, their average daily trading volume accounts for 16% of all ETF daily trading, far exceeding their 1% asset share. The high turnover rate amplifies the potential impact of these products on the market during the closing session—since daily rebalancing must be based on closing prices, related portfolio adjustments are concentrated in the final minutes of the trading day, resonating with index rebalancing, option hedging, and institutional orders.

AI Exposure Quadruples in Four Years, Concentration Risk Surges

Bloomberg's analysis of approximately 800 bullish leveraged equity ETFs shows that their overall nominal exposure has roughly quadrupled since 2022, becoming increasingly concentrated in a few AI-related names. By mid-2026, AI-related exposure had reached 58%, with the memory chip category being particularly prominent.

In the single-stock leveraged ETF sector, the concentration is even more striking: SK Hynix, Samsung Electronics, Micron Tech, and SanDisk, four memory chip companies, collectively account for nearly half of the exposure in single-stock leveraged ETFs. Since mid-2025, single-stock leveraged ETFs tracking major memory chip companies have attracted over $19 billion in net inflows, with SK Hynix-related products attracting about $10.8 billion, Samsung about $4.3 billion, Micron Tech about $1.9 billion, and SanDisk about $2.6 billion.

Rocky Fishman, founder of Asym Research, pointed out that the fundamental change in the leveraged ETF market in recent years is not the expansion of overall scale, but rather a "migration toward higher-volatility underlying assets, including the emerging category of single-stock leveraged ETFs."

Rebalancing Mechanism: Amplifying Volatility in Both Directions

The operating mechanism of leveraged ETFs determines their inherent procyclical nature. When the underlying stock rises, bullish leveraged funds must increase their exposure; when the stock falls, they must reduce exposure to maintain the specified leverage ratio. Meanwhile, short inverse ETFs may also be forced to buy after the underlying stock rises to restore the target leverage ratio—meaning that rebalancing operations for both bullish and bearish products on the same underlying asset can sometimes move in the same direction.

Nomura estimates that at the peak scale in June of this year, for every 1% fluctuation in the underlying security, leveraged ETFs needed to buy or sell approximately $10 billion worth of securities through rebalancing. Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, likened this mechanism to the "short Gamma" effect in the options market, stating that "significant fluctuations in the underlying asset produce subsequent amplification effects." She also warned that even investors with no interest in leveraged ETFs should be aware that these products may still impact their holdings.

Fishman stated that his most concerning scenario is "when a major event occurs at the company or market level near the close, forcing the day's rebalancing activities to be completed in an extremely short period."

The Korea Case: A Real-World Rehearsal of Extreme Volatility

Earlier this year, South Korean financial regulators approved the establishment of more than ten leveraged ETFs tracking Samsung and SK Hynix, with the initial intention of retaining local capital that had previously flowed heavily into similar overseas products. The CSOP KOSPI leveraged ETF listed in Hong Kong approached an asset size of nearly $17 billion at its peak, once becoming the world's largest single-stock leveraged ETF. Its size was too large relative to the daily free-float trading volume of SK Hynix, prompting investors to warn that the ETF had begun to drive the price movement of the underlying stock, rather than simply tracking it.

Local leveraged ETFs in South Korea attracted over $9 billion in inflows within just two months of their launch. Subsequently, the Kospi index experienced severe intraday volatility, with the shock spreading to global markets. South Korean financial regulators subsequently intervened, raising the minimum margin requirements for investors in related products and temporarily suspending the listing of new products.

Analysts pointed out that these funds were not the root cause of the sell-off—weakening chip prices, missed earnings expectations, and rising borrowing costs all played a role, while hidden forces such as hedge fund unwinding may have also fermented simultaneously. However, by layering massive leveraged exposure onto two stocks that already dominate the Kospi, these products are seen as significant drivers exacerbating extreme volatility. Peter Tchir, Head of Macro Strategy at Academy Securities, compared this situation to the collapse of VIX-linked leveraged products in early 2018:

"This is how the VIX ETF blow-up occurred; the mechanized operational process is fraught with risk."

Systemic Threat or Overblown Risk?

Not all market participants agree that leveraged ETFs constitute a systemic threat. Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, stated that while it is important for users to understand the mechanized trading rules of these products, "compared to other risks in the market, I wouldn't spend much time worrying about leveraged ETFs. Leveraged exposure encapsulated in transparent and liquid ETFs is easier to understand and assess than hidden exposures elsewhere."

Fishman also believes that widespread external concern about leveraged ETFs is exaggerated. These products indeed "have the potential to create feedback loops, but this is an effect that has existed for many years," and their potential rebalancing impact is "not economically significantly higher than in previous years." He also pointed out that "theoretically, they may one day grow into a systemically important factor, but we are still far from that step."

For investors in leveraged ETFs themselves, the risks are more direct and clear: the return promise of these products holds only within a single day. Management fees continuously drag down net asset value, and the "volatility decay" effect means that once the underlying asset oscillates repeatedly, the fund's net asset value will be eroded over time—even if the underlying asset eventually returns to its starting point, holders may have already suffered substantial losses.