This week’s tech rout did more than puncture one of the year’s hottest trades: it exposed the machinery of modern speculation — and how quickly it can work in reverse.
A retail-fueled unwind in AI chip stocks reverberated through semiconductor shares across Asia and the US, hammering leveraged ETFs and denting newly launched SpaceX funds. Elsewhere, the unraveling of Michael Saylor’s Strategy Inc. rattled crypto markets as one of the industry’s biggest financial-engineering machines for Bitcoin exposure came under pressure.
On the surface, the week’s casualties appeared unrelated. In reality, they belonged to the same corner of modern markets: products built to let investors express the hottest trade with more leverage, less friction and greater frequency.
That’s become one of the defining features of this bull market. Every winning narrative now spawns an expanding ecosystem of investment products built around the same idea, from leveraged ETFs and options to digital-asset derivatives and prediction markets. They differ in structure, but all promise investors a faster, more concentrated or more leveraged way to own the market’s hottest trade.
“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,” said Samuel Hartzmark, a professor of behavioral finance at Boston College.
This week showed how the process works in reverse. As investors rotated out of the market’s biggest AI winners amid mounting valuation concerns, the same ecosystem built to amplify the rally began amplifying the unwind.
The clearest warning came from South Korea, where retail investors have become among the world’s most enthusiastic buyers of funds promising two or three times the daily returns of AI chipmakers and other market favorites. As AI enthusiasm cooled, several of the country’s highest-profile trading vehicles lost more than 20% during the week, underscoring how quickly leverage can magnify reversals once momentum breaks.
The aftershocks spread well beyond Seoul.
Wall Street’s newest obsession, Space Exploration Technologies Corp., provided another illustration. Leveraged funds tied to the rocket company have attracted nearly $1 billion since launching earlier this month, even as the bullish products have tumbled about 40% from their debut, leaving many investors who piled in after the blockbuster IPO chasing gains that had largely already been made.
The category has grown rapidly. Leveraged ETFs, which use derivatives to deliver multiples of an asset’s daily return, now oversee more than $270 billion in assets globally, with the US accounting for more than $200 billion and Asia exceeding $45 billion, according to data compiled by Bloomberg. As their assets have grown, the funds have become a bigger source of forced buying and selling, potentially amplifying moves in the stocks and indexes they track. Barclays estimates rebalancing by US leveraged ETFs has recently surged to several times its long-term average, creating mechanical buying and selling flows potentially large enough to influence broader market trading.
It all comes in a week in which benchmark indexes suffered losses, with the S&P 500 falling nearly 2% while the Nasdaq 100 tumbled more than 4%.
Christopher Getter, a portfolio manager at Simplify Asset Management, says the growing menu of speculative funds can make it easier to bet on complex companies without fully understanding them. SpaceX, for example, is valued at levels that assume years of future growth, while its limited public float and anticipated index inclusion have created technical forces that can overwhelm traditional valuation metrics.
“There is a significant risk that smaller investors will end up feeling the pinch when the fundamentals reassert themselves,” he said.
The same dynamic has played out in crypto. Strategy has evolved from a corporate Bitcoin holder into the foundation for a growing ecosystem of investment products, giving investors multiple ways to express the same trade through ETFs, common equity and preferred shares. As sentiment turned, many of those wrappers came under pressure simultaneously, reinforcing the strains across digital assets.
Bullish and bearish leveraged ETFs tied to Strategy that launched in 2024 have lost more than 90% since inception, despite attracting billions of dollars from investors seeking amplified exposure to the stock’s volatility. The company’s preferred shares have also slid well below par, undercutting the idea that investors could find a steadier, income-producing way to participate in the same Bitcoin-fueled trade.
The pattern reflects a familiar Wall Street playbook in bull markets, according to Ellen Hazen, chief market strategist and portfolio manager at F.L.Putnam Investment Management.
“You get products like these that are marketed to meet perceived demand,” she said. “There are many financial products out there that do not have a reason to exist, but they are sold.”
The products did not cause the selloff. They revealed how much this bull market had come to depend on increasingly elaborate ways of expressing the same ideas — AI, single-stock technology trades and digital assets. As those products grow in size, they increasingly shape the feedback loop between investor sentiment, fund flows and price discovery, reinforcing both rallies and reversals.
“These products bring a casino element into the market,” said James St. Aubin, chief investment officer at Ocean Park Asset Management. “I would like to assume that these funds only appeal to a niche audience, but based on the flows it would appear that niche is growing rapidly. Anyone using leverage should understand they are playing with fire.”
Written by: Isabelle Lee and Denitsa Tsekova @Bloomberg
The post “AI Rout Exposes Wall Street’s $270 Billion Speculation Machine” first appeared on Bloomberg