Recent volatility in AI-related stocks has exposed the "machinery of modern speculation" and the rapid unwinding of positions. A tech rout, particularly impacting AI chip stocks, reverberated through semiconductor shares in Asia and the US, significantly affecting leveraged ETFs and newly launched SpaceX funds. This also rattled crypto markets, with Michael Saylor's Strategy Inc. seeing its Bitcoin-exposure financial products come under pressure. The Bloomberg report indicates that these seemingly unrelated casualties are all part of a market trend where investment products offer leveraged, concentrated, or faster ways to participate in popular trades.
The volatility is raising concerns about "crowded bets and leverage risks" in the AI trade, with positioning levels flashing red. Analysts are anticipating a rollercoaster ride, as massive leverage in ETFs, options-related hedging, and sharp price swings in semiconductors create a treacherous landscape. Leveraged ETFs, which use derivatives to amplify daily returns, have rapidly grown to oversee over $270 billion globally, with more than $200 billion in the US and over $45 billion in Asia. Their growth means they are becoming a significant source of forced buying and selling, potentially magnifying market moves.
This week's events demonstrated how the rebalancing process of these products can amplify reversals. As investors rotated out of top AI performers due to valuation concerns, the same ecosystem designed to boost the rally started amplifying the decline. For instance, in South Korea, where retail investors are keen on funds offering two or three times the daily returns of AI chipmakers, several high-profile trading vehicles lost over 20% in a week. Leveraged funds tied to SpaceX, which attracted nearly $1 billion since their launch earlier this month, have also tumbled about 40% from their debut. Benchmark indexes suffered losses, with the S&P 500 falling nearly 2% and the Nasdaq 100 tumbling over 4%.
Experts like James St. Aubin, CIO at Ocean Park Asset Management, liken these products to a "casino element" in the market, warning that those using leverage are "playing with fire." Ellen Hazen, Chief Market Strategist at F.L.Putnam Investment Management, notes that this pattern is a familiar Wall Street playbook in bull markets, where an expanding ecosystem of investment products, such as leveraged ETFs, options, and digital-asset derivatives, emerges around winning narratives like AI. While these products didn't cause the selloff, they revealed the market's increasing reliance on elaborate ways to express these ideas, shaping feedback loops between investor sentiment, fund flows, and price discovery.
