Not only Korean stocks, what are the risks of 200 billion US stock leveraged ETFs?

Since June, the Korean stock market has been showing global investors violent volatility driven by a market characterized by extremely high concentration and excessive leverage. Since 2000, the Korea Exchange has triggered circuit breakers only 11 times, but there were 3 such events last month alone. Compared with Korea, the leverage risk in the U.S. stock market is more reflected in the structural leverage of markets 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, hitting an all-time high. The size of U.S. leveraged ETFs has nearly reached $220 billion, nearly doubling from the end of March. Among them, the size of leveraged technology ETFs increased by 136%, and leveraged ETFs related to semiconductors grew by nearly 175% even more. The net exposure of hedge funds in the AI and semiconductor sectors remains at the 98th percentile over the past 5 years. The daily rebalancing trading volume of leveraged ETFs has reached a record $50 billion, accounting for 1.60% of S&P 500 futures trading volume—200% higher than the peak in 2020-2024.

At present, whether in the Korean stock market or the U.S. stock market, market pricing has clearly moved ahead of macro fundamentals. A large portion of the potential value of the AI industry has already been priced into stock prices in advance. Against this backdrop, the upside momentum in U.S. stocks is supported more by capital inflows and trading-structure mechanics than by fundamental improvements in corporate earnings, which also causes de-leveraging risks to continue accumulating.

The structural risk lies in high concentration. As capital continues to flow in, the semiconductor sector’s weight in the S&P 500 has climbed to 18.8%, which is 2 times the peak during the 2000 internet bubble. At the same time, the top 10 constituent stocks together account for nearly 40% of the index’s weight, meaning the market’s upward momentum is highly concentrated in a small number of AI beneficiaries. This implies that any marginal change in the performance of core holdings may be amplified through the leverage chain, leading to sharp volatility at the index level. These data collectively point to a core conclusion: leverage has shifted from being an important force driving bull-market gains to becoming a structural source of uncertainty risk in financial markets.

One of the biggest risks in U.S. stocks is structural market leverage

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 technology stocks rise and index weights increase, newly flowing-in funds will keep buying these leading companies, further driving up stock prices. In turn, rising stock prices improve index performance, attracting more capital 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 mechanical pattern of chasing gains and selling on losses turns capital flow from passively following the market into actively amplifying price volatility.