Behind the AI feast: Global stock markets are sitting on a leveraged "powder keg"
[Behind the AI Feast: Global Stock Markets Sitting on a Leverage "Tinderbox"] High leverage is always a double-edged sword - since this year, the sharp rise in the AI and semiconductor sectors has ignited the enthusiasm for long positions in the global market, and leveraged trading tools in the U.S. and South Korean markets have expanded sharply. Among them, the asset management scale of South Korean leveraged ETFs climbed to a historical peak of US$45 billion. However, as the South Korean stock index has frequently triggered circuit breakers recently and volatility has risen sharply, the lethality of leveraged trading in “boosting both rises and falls” is moving from theory to reality.
In the afternoon of July 7, the KOSPI index of the Korean Exchange fell by 8%, triggering the circuit breaker mechanism and trading was suspended for 20 minutes. As storage duo SK Hynix and Samsung Electronics both plummeted, related leveraged ETFs also fell sharply. Among them: Nanfang's two-time long Hynix once fell more than 20% during the session, and finally fell 15.64% for the whole day; Nanfang's two-time long Samsung Electronics fell 16.44%. Compared with the previous historical highs, the prices of both products have been "halved". High leverage is always a double-edged sword - since the beginning of this year, the sharp rise in the AI and semiconductor sectors has ignited the enthusiasm for long positions in the global market, and leveraged trading tools in the US and South Korean markets have expanded sharply. Among them, the asset management scale of South Korean leveraged ETFs climbed to a historical peak of US$45 billion. However, as the South Korean stock index has frequently triggered circuit breakers recently and volatility has risen sharply, the lethality of leveraged trading in “boosting both rises and falls” is moving from theory to reality. Recently, the Bank of Korea and many institutions have issued intensive risk warnings stating that leveraged funds are currently highly concentrated in technology heavyweights, and their procyclical trading mechanism is evolving from a market booster to a structural "powder keg". Once the trend is reversed, indiscriminate selling and liquidity crises may sweep the world. From scale carnival to cliff-like retracement Industry insiders believe that the continued expansion of leveraged ETFs is one of the important drivers of the recent intensification of market volatility in South Korea. The latest data from The Kobeissi Letter, an independent US macro research institution, shows that the asset management scale of South Korea’s leveraged ETFs has climbed to a historical peak of approximately US$45 billion, with a cumulative increase of approximately 800% since 2026. Leverage exposure accounted for 2.9% of South Korea's free float market capitalization, setting a new historical record and more than tripling from the beginning of the year. Retail funds have continued to pour in since May, with cumulative net purchases reaching 62 trillion won, further boosting the expansion of leveraged ETFs. In addition, according to statistics from CICC Research, the current total scale of global Korean stock leveraged ETFs reaches US$46.9 billion, accounting for 1.5% of the free circulation market value of Korean stocks. After the launch of South Korea's local single stock leveraged ETF, funds and transactions were highly concentrated in semiconductor heavyweights such as Samsung Electronics and SK Hynix. The leverage of this round of AI technology market is not unique to the Korean market. As the anchor of global technology asset pricing, the U.S. stock market is also experiencing rapid expansion of leveraged funds. According to Bloomberg statistics, the current total market value of leveraged and inverse leveraged stock ETFs in the U.S. stock market has approached US$200 billion, setting a record high. Funds are highly concentrated in the technology growth sector. Representative products include three times long semiconductor ETF, three times long Micron Technology ETF, three times long technology stock ETF, and two times long SanDisk and Tesla ETFs. Futu data shows that as of the end of June, the assets of the three-times long Semiconductor ETF were US$31.596 billion, a 150% increase from US$12.677 billion at the end of last year; the assets of the two-times long Micron Technology ETF were US$8.554 billion, an increase of 15.6 times compared with US$516 million at the end of last year. The "powder keg" effect on lever chains In the context of the surge in the scale of leveraged funds and increasingly violent market fluctuations, the Bank of Korea and many institutions have issued risk warning signals. The Bank of Korea warned in its financial stability report released on July 6 that leveraged ETFs linked to individual stocks such as Samsung Electronics and SK Hynix may exacerbate structural concentration risks in the domestic stock market and amplify procyclical fluctuations in the market. The Bank of Korea said that as the profitability of the semiconductor industry improves, a large amount of funds are accelerating to flow to a few leading companies. Once market expectations are reversed or the industry environment changes, investors' buying and selling behavior in the same direction under the leverage effect may further intensify one-way capital flows, thereby exacerbating the instability of the entire financial market. Bloomberg macro strategist Simon White said that leveraged ETFs naturally have the characteristics of "short gamma" in their trading mechanism: when the market rises, they are forced to chase high buys; and when the market falls, they have to follow suit and sell. This procyclical trading behavior will provide a boost in the direction of the market, thereby amplifying price fluctuations.
White believes that this mechanism may be one of the reasons why the Gamma value of US stocks has fallen into negative territory more frequently and deeply recently. More importantly, this means that leveraged ETFs are no longer just marginal instruments, but are gradually evolving into a structural factor that may affect the overall stability of the market. “Leverage in the stock market creates a highly technical backdrop for risk, and no matter how you assess the fundamentals, leveraged ETFs remain the biggest technical risk in this market,” said Alexander Altmann of Barclays Equity Tactical Strategy. Lu Xiaoyang, chief Chinese market analyst at FXTM, told a reporter from Shanghai Securities News that the current high leverage means that the market’s “error tolerance rate” is getting lower and lower. Once fundamentals decline, it is likely to become the catalyst for the next major correction in technology and AI-related stocks. Today's global market is like a "giant financial vacuum tube", and the world's liquid assets are highly concentrated in the AI supply chain. If a liquidity crisis breaks out in the U.S. and South Korean markets due to highly leveraged ruptures, it may affect the world through the following two mechanisms. The first is indiscriminate selling, that is, selling the most liquid assets: for example, when investors face a margin call, they cannot sell assets that have fallen to the limit or have no liquidity. Instead, they will be forced to cash out their high-quality assets with the most liquidity and the most substantial book profits. This means that liquidation of positions by retail investors and leveraged funds in South Korea or the United States may trigger a sell-off of core Nasdaq 100 stocks, thereby putting pressure on global stock markets. Second, the amplitude of derivatives has expanded: the Nasdaq has risen rapidly recently, forcing a large number of market makers to buy for hedging. When the market is on an upward trajectory, they further promote the upward trend; but once the trend reverses and volatility rises sharply, the speed and volume of backhand selling by these market makers will far exceed that of retail investors, thus compressing market liquidity. (
White believes that this mechanism may be one of the reasons why the Gamma value of US stocks has fallen into negative territory more frequently and deeply recently. More importantly, this means that leveraged ETFs are no longer just marginal instruments, but are gradually evolving into a structural factor that may affect the overall stability of the market. “Leverage in the stock market creates a highly technical backdrop for risk, and no matter how you assess the fundamentals, leveraged ETFs remain the biggest technical risk in this market,” said Alexander Altmann of Barclays Equity Tactical Strategy. Lu Xiaoyang, chief Chinese market analyst at FXTM, told a reporter from Shanghai Securities News that the current high leverage means that the market’s “error tolerance rate” is getting lower and lower. Once fundamentals decline, it is likely to become the catalyst for the next major correction in technology and AI-related stocks. Today's global market is like a "giant financial vacuum tube", and the world's liquid assets are highly concentrated in the AI supply chain. If a liquidity crisis breaks out in the U.S. and South Korean markets due to highly leveraged ruptures, it may affect the world through the following two mechanisms. The first is indiscriminate selling, that is, selling the most liquid assets: for example, when investors face a margin call, they cannot sell assets that have fallen to the limit or have no liquidity. Instead, they will be forced to cash out their high-quality assets with the most liquidity and the most substantial book profits. This means that liquidation of positions by retail investors and leveraged funds in South Korea or the United States may trigger a sell-off of core Nasdaq 100 stocks, thereby putting pressure on global stock markets. Second, the amplitude of derivatives has expanded: the Nasdaq has risen rapidly recently, forcing a large number of market makers to buy for hedging. When the market is on an upward trajectory, they further promote the upward trend; but once the trend reverses and volatility rises sharply, the speed and volume of backhand selling by these market makers will far exceed that of retail investors, thus compressing market liquidity. (