Leveraged ETFs continue to grow in size and it's having a real impact on markets.
Leveraged ETFs have continued to grow in popularity. Market and sector leveraged funds have been around for over a decade, but single stock leveraged ETFs are relatively new. Believe it or not, there are already four 2x long SpaceX (SPCX) ETFs! These leveraged funds have grown in popularity as retail investors have become increasingly active in markets. While we have written about leveraged funds in the past, more so about how their daily reset leverage impacts returns over time (click here for more), their growing size is becoming a market force on its own.
As an example, the iShares Semiconductor ETF (SOXX) has north of $35 billion in AUM, a large fund in its own right. SOXX’s 3x levered counterpart, the Direxion Daily Semiconductors Bull 3x ETF (SOXL), has over $28 billion in AUM. Long story short, with $28 billion in AUM SOXL must attempt to replicate the exposure of almost $85 billion in SOXX each day. The daily rebalance for such a large amount of exposure leads to massive flows each day which act to reinforce the move in the underlying index. If SOXX is up, then SOXL must buy more in an increasing quantity with the opposite also being true. Digging a bit further, leveraged funds typically use swaps to replicate leveraged exposure, however, these swaps must be hedged by the counterparty (market maker) which means they need to buy if the underlying is going higher and sell if the underlying is heading lower. If you’ve heard the term “negative gamma” this is the dynamic people are referring to, market makers must match whichever way the market is moving. As these leveraged funds grow in absolute size, the move chasing market makers must do has a meaningful impact on volatility. While we’re only focusing on a leveraged long fund, the dynamic is the same for inverse leveraged funds as well.
While it’s not the case that leveraged funds are solely to blame for volatility in semiconductors, it is difficult to point to a single data point other than the growing rebalance flows. As an attempt to show that larger flows from leveraged ETFs are having an impact on volatility, particularly single day moves as these funds rebalance daily, we looked at the number of up or down 5% days for SOXX going back to 2010. So far in 2026 there have been nine +/-5% days for SOXX, which is on pace to break the record set in 2020 and 2022, two much more volatile years for the market. Even with the tariff tantrum and subsequent rally last year, 2026 has already tied the number of +/-5% days from 2025. There are a plethora of narratives surrounding market movement, but it’s clear that mechanical flows from growing leveraged ETFs are having a real impact on magnifying market movements. Even if you can’t use them for clients, understanding the impact leveraged funds can have on markets is becoming increasingly important.
