A sharp decline in artificial intelligence stocks has exposed the growing role of leveraged investment products across global markets. The sell-off spread from major US technology companies to Asian chipmakers, SpaceX-linked funds and crypto-related assets.
The market decline also raised questions about how investors gain exposure to popular themes. Leveraged ETFs, options and other products allow traders to increase potential returns. Yet they can also deepen losses when prices move in the opposite direction.
Investors moved away from major AI stocks this week as concerns about high valuations and rising infrastructure costs grew. Alphabet shares fell about 7% in one session, erasing roughly $270 billion from the company’s market value. The NASDAQ Composite and semiconductor shares also recorded steep declines.
The selling soon reached Asian markets. Samsung Electronics, SK Hynix and other semiconductor companies came under pressure as investors reduced exposure to chipmakers. In South Korea, several popular funds offering two or three times the daily returns of major technology stocks lost more than 20% over the week.
Leveraged ETFs use derivatives to multiply an asset’s daily price movement. Global assets held by these funds have climbed above $270 billion. The United States accounts for more than $200 billion, while Asian markets hold over $45 billion, according to compiled market data.
As these funds expand, their daily rebalancing can create large buying and selling orders. Barclays estimated that recent rebalancing activity among US leveraged ETFs reached several times its long-term average. These mechanical trades can add pressure when markets move sharply.
Samuel Hartzmark, a behavioral finance professor at Boston College, questioned whether some products serve retail investors. “If there’s a general desire from unsophisticated retail investors for some attribute that does not actually make them better off, this strategy too will be made available to them,” he said.
Meanwhile, funds linked to SpaceX offered another example of concentrated market exposure. Leveraged SpaceX products attracted nearly $1 billion after the rocket company’s public market debut. Yet some bullish funds fell about 40% from their launch levels as the share price reversed.
The products gave investors a faster way to bet on SpaceX without buying only the underlying shares. Still, the company’s limited public float and expected index inclusion created technical price pressures. These forces sometimes moved the stock independently of standard company measures.
Christopher Getter, a portfolio manager at Simplify Asset Management, raised doubts about whether smaller investors fully understand those risks. “There is a significant risk that smaller investors will end up feeling the pinch when the fundamentals reassert themselves,” he said.
Benchmark indexes also weakened during the broader retreat. The S&P 500 lost nearly 2%, while the NASDAQ 100 dropped more than 4%. Selling in large technology stocks placed further pressure on funds tied to AI, semiconductors and newly listed companies.
Additionally, the decline reached crypto markets through Strategy, the company known for its large Bitcoin holdings. Strategy has become the centre of several investment products, including leveraged ETFs, common shares and preferred stock.
Bullish and bearish leveraged ETFs linked to Strategy have lost more than 90% since their 2024 launches. The funds had attracted billions of dollars from traders seeking amplified exposure to the company’s price swings. Strategy’s preferred shares also fell below their original values.
The simultaneous decline showed how several products can track the same market idea. Investors used different structures, but each relied heavily on Bitcoin demand and Strategy’s ability to raise capital.
Ellen Hazen of F.L. Putnam Investment Management questioned the need for some products. “You get products like these that are marketed to meet perceived demand,” she said. “There are many financial products out there that do not have a reason to exist, but they are sold.”
The products did not start the market decline. Still, their structure increased trading activity as AI stocks, SpaceX shares and crypto assets fell. James St. Aubin of Ocean Park Asset Management also expressed doubt about the growing demand. “Anyone using leverage should understand they are playing with fire,” he said.
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