A sweeping sell-off in artificial intelligence stocks has pulled back the curtain on the sprawling world of leveraged investment products, exposing risks that now ripple through a $270 billion market. The downturn, which started with major US tech firms, quickly spread to Asian chipmakers, SpaceX-linked funds, and crypto-related assets, underscoring how interconnected and fragile these speculative vehicles have become.
Leveraged AI Funds Intensify the Sell-Off
Investors fled AI stocks this week amid mounting concerns over lofty valuations and surging infrastructure costs. Alphabet shares dropped about 7% in a single session, wiping out roughly $270 billion in market value. The NASDAQ Composite and semiconductor stocks also suffered heavy losses.
The selling pressure soon crossed into Asia. Samsung Electronics, SK Hynix, and other chipmakers saw declines as investors reduced exposure. In South Korea, several popular funds offering two or three times the daily returns of major tech stocks lost more than 20% over the week.
Leveraged ETFs, which use derivatives to magnify daily price movements, now hold over $270 billion globally—more than $200 billion in the US and over $45 billion in Asia. Their daily rebalancing can generate massive buy and sell orders, amplifying market moves. Barclays estimated that recent rebalancing by US leveraged ETFs reached several times its long-term average.
“If there’s a general desire from unsophisticated retail investors for some attribute that does not actually make them better off, this strategy too will be made available to them.” — Samuel Hartzmark, behavioral finance professor at Boston College
SpaceX Funds Highlight the Dangers of Concentrated Bets
Funds tied to SpaceX offered another cautionary tale. After the rocket company’s public debut, leveraged SpaceX products attracted nearly $1 billion. Yet some bullish funds fell about 40% from their launch prices as the stock reversed course.
These products let investors amplify their bets on SpaceX without buying the underlying shares directly. However, the company’s limited public float and expected index inclusion created technical pricing pressures independent of fundamentals.
“There is a significant risk that smaller investors will end up feeling the pinch when the fundamentals reassert themselves.” — Christopher Getter, portfolio manager at Simplify Asset Management
Benchmark indexes also weakened. The S&P 500 lost nearly 2%, while the NASDAQ 100 dropped more than 4%. Selling in big tech stocks further pressured funds tied to AI, semiconductors, and newly listed companies.
Strategy’s Decline Spreads Pain to Crypto Markets
The rout extended into crypto via Strategy, the company known for its massive Bitcoin holdings. Strategy has become the centerpiece of several products—leveraged ETFs, common shares, and preferred stock.
Bullish and bearish leveraged ETFs linked to Strategy have lost more than 90% since their 2024 launches, after attracting billions from traders seeking amplified exposure. Strategy’s preferred shares also fell below their original values.
The simultaneous decline showed how multiple products can converge on the same risky idea. Investors used different structures, but all depended on Bitcoin demand and Strategy’s ability to raise capital.
“You get products like these that are marketed to meet perceived demand. There are many financial products out there that do not have a reason to exist, but they are sold.” — Ellen Hazen, F.L. Putnam Investment Management
The products didn’t start the decline, but their structure supercharged trading activity as AI stocks, SpaceX shares, and crypto assets fell. James St. Aubin of Ocean Park Asset Management summed it up: “Anyone using leverage should understand they are playing with fire.”