Not just Korean stocks, what about the risks of 200 billion US stock leveraged ETFs?

Since June, the South Korean stock market has shown global investors the intense volatility caused by high market concentration and excessive leverage. Since 2000, the Korea Exchange has triggered circuit breakers only 11 times, with 3 triggered last month. Compared with South Korea, the leverage risk in U.S. stocks is more reflected in market-structure leverage jointly built by leveraged ETFs, zero-day options, passive ETFs, and CTAs.

As of now, U.S. margin debt has risen 54% year over year to $1.4 trillion, reaching a record high. The size of leveraged ETFs in the U.S. stock market has nearly approached $220 billion, almost doubling from the end of March. Among them, the scale of technology leveraged ETFs grew by 136%, while semiconductor-related leveraged ETFs grew by nearly 175%. Hedge funds’ net exposure in the AI and semiconductor sectors has remained at the 98th percentile over the past 5 years. Meanwhile, the daily rebalancing trading volume of leveraged ETFs reached a record $50 billion, accounting for 1.60% of S&P 500 index futures trading volume—200% higher than the peak between 2020 and 2024.

Currently, whether in the Korean market or the U.S. market, market pricing has clearly moved ahead of macro fundamentals, with a large amount of the potential value of the AI industry priced into stock prices in advance. Against this backdrop, the upside momentum in U.S. stocks is driven more by support from capital inflows and trading structure than by fundamental improvements in corporate earnings, which also allows deleveraging risks to keep accumulating.

The structural risk lies in high concentration. As capital continues to flow in, the weight of the semiconductor sector in the S&P 500 has climbed to 18.8%, twice the peak during the 2000 internet bubble period. At the same time, the top 10 constituent stocks together account for nearly 40% of the index weight, and the market’s upside momentum is highly concentrated in a small number of AI beneficiary stocks. This means that any marginal change in the performance of key underlying stocks may be amplified through the leverage chain, leading to large fluctuations at the index level. Taken together, these data point to one core conclusion: leverage has shifted from being an important force driving bull-market gains to a structural source of uncertainty in financial markets.

One major risk for U.S. stocks is leverage in market structure

In recent years, passive investing has continued to expand, and ETFs have become the most important source of incremental capital in the U.S. stock market. Because passive funds allocate assets according to index weights, as tech stocks rise and index weights increase, newly inflowing funds will continue to buy these leading companies, further pushing up stock prices. In turn, rising stock prices improve index performance, attracting more capital inflows into ETFs—thereby forming a positive feedback loop.

The daily rebalancing mechanism of leveraged ETFs requires managers to buy when the market rises and sell when it falls. This mechanized “buying on the rise and selling on the decline” turns capital flow from passively following the market into actively magnifying price volatility.