This week, global technology stocks suffered a heavy blow, marking not only the end of the year’s hottest AI trading rally but also revealing the deep-seated risks of high-leverage products in modern financial markets. When market sentiment reverses, tools such as leveraged ETFs built around popular themes simultaneously amplify the downside. After retail investors collectively sold off AI chip stocks, the downturn in the semiconductor sector quickly spread to Asian and U.S. equity markets, dragging down multiple leveraged ETFs and the recently listed SpaceX-related fund (SPCX). At the same time, weakness in the share price of Michael Saylor’s Strategy (MSTR) also pressured financial products built around Bitcoin, triggering turbulence in the cryptocurrency market.
On the surface, the assets hit this week appear unrelated, but in essence, they are all products of the same kind in the current bull market: high-leverage, high-frequency, low-barrier financial tools built around the hottest investment themes. In recent years, almost every market hotspot has given rise to a complete product ecosystem, including leveraged ETFs, options, and digital asset derivatives. These products have different structures, but together they help investors bet on popular trends with higher leverage and more concentrated exposure. Boston College professor Samuel Hartzmark noted that as long as retail demand exists, the market will continue to roll out such high-risk products, even if they are not necessarily truly beneficial to investors.
This week’s market decline is precisely an example of the above mechanism working in reverse. The South Korean market is particularly typical, where local retail investors are keen on buying leveraged ETFs that provide two to three times the daily return of AI chip stocks. As the AI theme cooled, several popular products posted weekly declines of more than 20%, highlighting the destructive power of leverage when trends reverse. The shock also reached Wall Street’s new hotspot, SpaceX, whose related leveraged fund, despite attracting nearly $1 billion since its launch, has fallen about 40% cumulatively, with many investors buying in at the tail end of the rally. According to statistics, the global leveraged ETF market now exceeds $270 billion in assets under management, with the U.S. accounting for more than $200 billion. Barclays pointed out that the scale of recent rebalancing trades in such products has surged sharply, and mechanical buy and sell orders have already been able to noticeably affect the movements of related stocks and indices. This week, the S&P 500 fell nearly 2%, while the Nasdaq 100 dropped more than 4%.
Christopher Getter, portfolio manager at Simplify AM, said that the abundance of speculative products allows investors to bet on a company’s future without understanding its business model. Using SpaceX as an example, he noted that current valuations already embed excessively high expectations, and the technical fund flows from future index inclusion are weakening the traditional valuation framework. Once fundamentals become the dominant driver, smaller retail investors will bear the brunt. A similar situation is seen in the cryptocurrency market, where Strategy has evolved into a platform offering multiple investment vehicles around Bitcoin. Its long and short leveraged ETFs, launched in 2024, have attracted billions of dollars but have posted cumulative declines of more than 90%, while the company’s preferred stock prices have also fallen below par, undermining the logic of fixed-income participation in Bitcoin.
Ellen Hazen, chief market strategist at F.L.Putnam Investment Management, believes this is precisely Wall Street’s customary business model in a bull market – continuously rolling out products that cater to demand, even when not necessary. Analysts point out that while these products are not the root cause of the decline, they have exposed the fragility of the current bull market, which relies too heavily on a few themes like AI and digital assets. When leverage tools expand around the same narrative, they profoundly affect sentiment and pricing, amplifying both upside and pullbacks. James St. Aubin, chief investment officer at Ocean Park Asset Management, bluntly stated that such products are adding a “casino” flavor to the market, and the participant base is expanding rapidly. “Anyone using leverage should understand they are playing with fire.”
On the funding front, U.S. equity funds recorded a net outflow of about $8.5 billion in the week ended June 24, the first weekly outflow in three months. Technology sector funds led the decline with a record $9.3 billion in net redemptions, a stark reversal from the historic $19.2 billion net inflow the previous week. BofA’s strategy team noted that this reflects growing investor divergence over tech stock valuations and the sustainability of the AI narrative.
