U.S. markets face rising risk from leveraged chip bets

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U.S. markets risk from chip bets

Highlights

Leveraged ETF assets in the U.S. hit a record $218 billion, up 60% since March, with tech and semiconductors comprising 67% of the total.
Retail investors in South Korea triggered over 1.2 million margin calls amid a 30% plunge in the KOSPI index, driving concerns over similar risks in U.S. markets.
U.S. margin balances reached a record $1.3 trillion, or 52% of gross customer balances, heightening vulnerability as the SOX semiconductor index fell 25% into a bear market.

Leveraged ETF buildup raises market stress

As Reuters reports, volatility in South Korea’s chip-heavy KOSPI index is drawing fresh attention to similar fault lines in the U.S., where leveraged exchange-traded funds tied to technology and semiconductors have expanded rapidly. The KOSPI is down more than 30% from its peak a month ago, while daily moves of 4% or more have become common and 30-day realized volatility has climbed to its highest level since 1998.

Regulators in Seoul are stepping up efforts to curb the swings, which appear to be driven in part by heavily leveraged retail investors using ETFs. Goldman Sachs says more than 1.2 million leveraged retail trading accounts in South Korea had triggered margin calls as of July 13, with an estimated 320,000 to 360,000 accounts fully liquidated.

In the U.S., leveraged ETF use is also surging. Assets under management in these funds 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 risen 136% over the same period, while leverage linked to semiconductor exposure has nearly tripled, leaving tech and semis accounting for 67% of all leveraged ETF assets under management.

That buildup has supported U.S. equities while chips and AI outperform, but it also leaves markets more exposed when sentiment reverses. Bob Elliott at Unlimited says the result is a concentration of speculation that increases the risk of a deeper drawdown, as leverage magnifies losses on the way down as much as gains on the way up.

Retail participation adds pressure to Wall Street

Broader retail positioning suggests the vulnerability is not limited to a narrow corner of the market. Since 2021, the retail share of U.S. trading volumes in leveraged index ETFs has been roughly double the share for equivalent non-leveraged products, while margin balances at Interactive Brokers, Robinhood and Charles Schwab rose to 1.8% of customer assets earlier this year, a record.

Across 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, Goldman says. That is the highest share on record and 6 percentage points above the previous peak in 1998, although the figures also include institutional money and borrowing used to fund short positions.

The semiconductor downturn is now putting those positions under strain. While the S&P 500 and Nasdaq are only 2% and 7% below their June peaks, respectively, the SOX semiconductor index is 25% below its recent high, placing it in a bear market, with 30-day realized volatility at its highest since 2003.

The scale of leveraged ETFs remains below 1% of total ETF and mutual fund assets, according to Goldman Sachs, which limits the risk of a systemic crisis. Even so, the combination of concentrated tech exposure, elevated borrowing and rising retail participation suggests investors and parts of the broader U.S. market could face a difficult few weeks if the chip slump continues.

In our earlier article, we looked at the sharp volatility in U.S. semiconductor and AI-linked stocks as Q2 earnings season begins, even as the sector is expected to deliver a large share of S&P 500 profit growth. We noted that speculative positioning, strong retail participation, and the expansion of leveraged ETFs can amplify both rallies and selloffs, increasing the risk of broader market stress if guidance disappoints.

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