The explosive growth of leveraged ETFs can no longer be ignored in terms of its impact on U.S. stocks.

In recent years, the scale of leveraged ETFs in the U.S. has rapidly expanded, magnifying market liquidity while also becoming an important force influencing the trading structure of U.S. stocks. As more and more funds flow into leveraged and inverse leveraged stock ETFs, the rebalancing trading volume of such products before the daily close continues to break records. Their pro-cyclical trading mechanism is amplifying market volatility and exacerbating price swings at the end of the trading session.

Bloomberg macro strategist Simon White recently wrote that the total asset size of U.S. leveraged and inverse leveraged stock ETFs has approached $200 billion, with rebalancing alone generating buying and selling demand of up to $50 billion or more on some trading days, hitting a new all-time high. Even when standardized by the average daily trading volume of E-mini S&P 500 futures, the proportion of rebalancing flows relative to market trading volume is also at historical highs, meaning this force is growing faster than the expansion of overall market liquidity.

White believes that leveraged ETFs naturally have "short gamma" characteristics: they must continue buying when the market rises and are forced to sell when it falls, with their trading behavior further amplifying volatility in the direction of the market. This may not only explain the recent phenomenon of the S&P 500's gamma falling into negative territory more frequently and more deeply, but also suggests that leveraged ETFs are gradually evolving into a structural factor affecting market stability.

Scale Approaching $200 Billion, Rebalancing Flows at Record Highs

Leveraged ETFs are not new products, having been around for nearly two decades, but the real explosive growth has occurred in recent years.

According to Bloomberg data, the total market value of all leveraged and inverse leveraged stock ETFs in the U.S. is now close to $200 billion, a record high. Among them, the most concentrated funds are primarily in technology growth sectors, including the 3x Long Semiconductor ETF, 3x Long Micron Technology ETF, 3x Long Technology ETF, and 2x Long SanDisk and Tesla products, indicating that investor demand for leverage in technology and AI-related assets continues to heat up.

Compared to regular ETFs, leveraged ETFs not only need to handle routine rebalancing demands such as subscriptions, redemptions, and index adjustments but must also maintain a fixed leverage multiple daily. Therefore, regardless of market fluctuations, they must continuously adjust their holdings.

This also determines that their trading is inherently pro-cyclical.

For long leveraged ETFs, after the stock market rises, the fund's net asset value increases, causing the actual leverage ratio to decline. The fund must continue buying the underlying assets to restore the target leverage. Conversely, when the market falls, it must sell assets to reduce risk exposure. Inverse leveraged ETFs, though opposite in direction, also require mechanical rebalancing trades after price movements.

"Short Gamma" Attribute Amplifies Market Volatility

It is precisely this mechanical rebalancing mechanism that makes leveraged ETFs structurally similar to holding a "short gamma" position over the long term.

So-called short gamma means that the position holder must keep chasing the market trend to buy or sell, rather than trading against it, thus further amplifying price volatility. When the market rises, they are forced to continue buying; when the market falls, they must continue selling, thereby reinforcing the original trend.

White points out that this mechanism helps explain the recent phenomenon of the market’s gamma falling into negative territory faster and deeper, with leveraged ETFs being one of the key driving forces behind it.

More notably, these rebalancing trades are typically concentrated in the final minutes before the market close, making their impact on end-of-day liquidity and price volatility particularly pronounced. When the market itself lacks liquidity, large-scale concentrated buying or selling can even further amplify end-of-day movements.

White further notes that even after excluding overall market volume growth and standardizing by the trading volume of E-mini S&P 500 futures, the importance of leveraged ETF rebalancing flows is also at historically high levels. This means that their impact on the market is not only reflected in the absolute scale expansion but also in the accelerating pace of their penetration into the overall market structure.

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