The recent broad sell-off in semiconductor stocks has spared no investor, and the use of leveraged trading has dramatically increased the difficulty of recovering from losses.

The iShares Semiconductor ETF (SOXX) has fallen approximately 25% from its peak on June 22. Over the same period, the Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL) has plummeted by nearly two-thirds.

This latest downturn is part of a broader chip-stock rout, while the impact on the rest of the market has been relatively contained. After SK Hynix disclosed its earnings report, a wave of large-scale leveraged liquidations swept through overnight markets, causing the Korea Composite Stock Price Index to plunge as much as 13% intraday before bargain hunters narrowed the loss to 5.98%.

Goldman Sachs traders noted that there are still funds speculating on buying the dip in the memory sector, suggesting the sell-off is a disorderly rout rather than a full-blown panic capitulation. This sell-off also triggered a record number of intraday trading halts.

According to Yahoo Finance AlphaSpace data, SOXX is down 25% from its high, while SOXL has fallen 63%. Many would assume that SOXL's decline should be three times that of SOXX, or 75%. However, SOXL is not experiencing a malfunction. The fund's rule is to triple the daily return of the NYSE Semiconductor Index. The key word here is "daily."

This ETF resets its leveraged exposure at the end of each trading day. Gains and losses on the following day are compounded based on the previous day's closing net asset value. Therefore, the final gain or loss over a multi-week period does not equal three times the index's return for that same period. If the chip sector were to steadily rise, this product structure would be highly effective. However, in a scenario of sharp declines and wide, volatile sideways trading, the drawbacks of daily leverage resetting are fully exposed.

The difficulty of recovering losses after a decline is vastly different: a 25% drop in SOXX only requires a rebound of about 33% to break even, while a 63% plunge in SOXL requires a massive 170% rally to erase the losses.

Wall Street is increasingly designing leveraged products for highly volatile sectors. Just days after SpaceX's public listing, Wall Street quickly launched several leveraged derivatives linked to it. A large number of investors remain heavily invested in these leveraged tools.

Strategas, a division of investment bank Baird, estimates that the top 200 leveraged ETFs by market size have a combined nominal gross exposure of over $400 billion. While this exposure has shrunk by about $100 billion over the past month, it remains near historically high levels.

In absolute terms, the scale of this pullback is massive, but compared to the previous boom in leveraged ETFs, Todd Sohn, the chief ETF strategist at Baird's Strategas, offered a blunt assessment: "So far, this is just a flesh wound."