Leveraged ETFs are emerging as a hidden force in the AI rally, with their influence increasingly drawing attention from market observers.

A recent Bloomberg analysis reveals that exposure of bullish leveraged ETFs to AI-related stocks has surged from 26% in 2022 to 58%, with just ten companies accounting for two-thirds of this exposure. The concentration is heavily tilted toward Nvidia, SK Hynix, and Micron Technology.

The risks of this trend are no longer confined to investors in these leveraged products themselves. A recent sharp volatility episode in South Korea's stock market serves as a cautionary tale—leveraged ETFs tracking SK Hynix and Samsung Electronics at their peak accounted for up to 70% of daily trading volume in Seoul, causing the benchmark Kospi index to fluctuate more than Bitcoin. JPMorgan strategist Nikolaos Panigirtzoglou noted that given the heavy tilt of these products toward tech stocks, "leveraged stock ETFs will continue to generate large rebalancing flows and push up tech stock volatility."

Globally, leveraged ETFs hold approximately $250 billion in total assets, a fraction of the over $22 trillion ETF market. However, their daily trading volume represents 16% of all ETF turnover, far exceeding their 1% asset share. The high daily turnover multiplier amplifies the potential impact of these products on market close, as daily rebalancing must be executed at closing prices, concentrating trades in the final minutes of the session and overlapping with index rebalancing, options hedging, and institutional order flows.

AI exposure quadruples in four years, concentration risk spikes

Bloomberg's analysis of about 800 bullish leveraged stock ETFs shows that since 2022, their total notional exposure has roughly quadrupled, increasingly converging on a few AI-related names. By mid-2026, AI-related exposure reached 58%, with memory chip stocks being particularly prominent.

In the single-stock leveraged ETF space, concentration is even more striking: SK Hynix, Samsung Electronics, Micron Technology, and SanDisk together account for nearly half of all single-stock leveraged ETF exposure, all being memory chip makers. Since mid-2025, single-stock leveraged ETFs tracking major memory chip companies have attracted over $19 billion in net inflows, with SK Hynix-related products drawing about $10.8 billion, Samsung about $4.3 billion, Micron Technology about $1.9 billion, and SanDisk about $2.6 billion.

Rocky Fishman, founder of Asym Research, points out that the fundamental change in the leveraged ETF market in recent years is not the expansion of overall size, but "a shift toward more volatile underlying assets, including the emerging category of single-stock leveraged ETFs."

Rebalancing mechanism: Amplifying volatility in both directions

The operating mechanism of leveraged ETFs inherently creates a pro-cyclical dynamic. When the underlying stock rises, bullish leveraged funds must increase exposure; when it falls, they must reduce exposure to maintain a fixed leverage multiple. Short-selling inverse ETFs may also be forced to buy after the underlying stock rises to restore the target leverage ratio—meaning rebalancing operations for bullish and bearish products on the same underlying asset can sometimes move in the same direction.

Nomura estimated that at the peak of scale in June, for every 1% move in the underlying securities, leveraged ETFs would need to buy or sell about $10 billion in securities through rebalancing. Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, likens this mechanism to the "short gamma" effect in options markets, where "large moves in the underlying asset create subsequent amplifying effects." She warns that even investors with no interest in leveraged ETFs should be aware that these products can still impact their holdings.

Fishman says his most concerning scenario is "a sudden major event at the company or market level near the close, forcing the day's rebalancing activity to be concentrated in a very short time."

South Korea case: A real-world preview of extreme volatility

Earlier this year, South Korean financial regulators approved the listing of over a dozen leveraged ETFs tracking Samsung and SK Hynix, aiming to retain local funds that had previously flowed to similar products overseas. The CSOP SK Hynix leveraged ETF listed in Hong Kong peaked at nearly $17 billion in assets, becoming the world's largest single-stock leveraged ETF. Its size, relative to SK Hynix's daily free-float trading volume, was so large that investors warned the ETF had begun to reverse-drive the underlying stock's price rather than simply tracking it.

Within just two months of listing, South Korea's local leveraged ETFs attracted over $9 billion in inflows. Subsequently, the Kospi index experienced sharp intraday swings, with shocks spreading to global markets. South Korean regulators then stepped in, raising minimum margin requirements for investors in these products and temporarily suspending new listings.

Analysts note that these funds were not the root cause of the sell-off—weaker chip prices, disappointing earnings, and rising borrowing costs all played a role, and hidden forces like hedge fund unwinding may have also been at work. However, by layering massive leveraged exposure onto two stocks that already dominated the Kospi, these products were seen as a key amplifier of extreme volatility. Peter Tchir, head of macro strategy at Academy Securities, compares this situation to the 2018 collapse of VIX-linked leveraged products, stating: "This is how the VIX ETF blew up—mechanical processes are full of risk."

Systemic threat or overly feared risk?

Not all market participants agree that leveraged ETFs pose a systemic threat. Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, says it's important for users to understand the mechanical trading rules of these products, "but compared to other risks in the market, I wouldn't spend much time worrying about leveraged ETFs. Leveraged exposure packaged in transparent and liquid ETFs is easier to understand and assess than hidden exposure elsewhere."

Fishman also believes that widespread concerns about leveraged ETFs are somewhat exaggerated. These products "could potentially create feedback loops, but this is an effect that has existed for years," and the potential rebalancing impact "is not economically higher than it was in the past few years." He adds, "In theory, they might one day grow to be systemically important, but we are far from that point."

For investors in leveraged ETFs themselves, the risks are more direct and clear: the return promise of these products holds only on a single-day basis. Management fees continuously erode net asset value, and the "volatility decay" effect means that if the underlying asset oscillates repeatedly, the fund's net value will be steadily eroded over time—even if the underlying returns to its starting point, holders may face substantial losses.