The U.S. leverage ETF market has experienced a marked upswing in the last two years, and the scale of funding has continued to expand, but the risk discussions around these products have also increased. It was reported that such products attract capital by zooming in and down on a daily basis, but in a highly volatile environment they may expose investors to large losses, even if they judge in the right direction.
Two years, over 400.
Business Insider reports that the United States currently has about 700 leverages of the ETF, over 400 of which have only been introduced in the past two years, with management funds of about $200 billion. Because the product is leveraged, it has a nominal exposure of about $500 billion.
This type of ETF usually tracks the single day performance of shares, indices or single shares and provides a double or triple drop. For investors with more or less clear positions, the attractiveness of such products is that they can rapidly amplify gains, but losses can be magnified simultaneously.
The daily replacement causes fluctuations and losses
The article refers to the view of the market that the core risk of leverage ETF is to reposition the warehouse on a daily basis. If the target price fluctuates significantly over time, the net product value will continue to erode in repeated increases and declines, rather than simply responding to the cumulative increase over time.
In the case of 2-triggered products, the target rose 10 per cent in the first day and 20 per cent in the next day; the target fell 10 per cent and the product fell 20 per cent. Two days later, the average holder lost about 1 per cent and the leverage ETF holder lost about 4 per cent. If similar fluctuations persist, losses will accumulate further.
Korea has suspended new products
After the release of a single lever, ETF, in May this year, the products quickly attracted diaspora funds. HSBC claims that on part of the trading day, such ETFs once accounted for 35 per cent of South Korea's stock market transactions, and the magnification of market volatility began to show.
As products require frequent rebalancing to maintain leverage, the volume of the trade itself can push up volatility. Korea ' s stock market is concentrated in Samsung Electronics and SK Hercules, and related transactions further exacerbate short-line shocks of shares and indices.
The Korean Government has announced this week that it will no longer approve a new single lever, ETF, and will significantly raise the investor ' s purchasing threshold. The head of the Korea Financial Supervisory Authority had also publicly expressed regret at the release of such products.
It's a higher risk in a single share.
It was mentioned that some of the index leverage ETFs have achieved very high returns over the past decade or more, such as TQQQ for tracking the NASDAQ 100 index. However, according to interviewees, this was more the result of the long-term growth of the Science and Technology Unit, the high degree of index dispersion and the relatively favourable combination of volatile environments.
By contrast, a single leverage ETF is more likely to experience a rapid decline in netting in sharp fluctuations. According to Strategy-related products, for example, from September 2024 to the end of June this year, Strategy stock prices fell by about 38 per cent, while the multi-leverage ETFs fell by about 95 per cent, showing that high volatility was sufficient to erode returns on both sides.