Semiconductor stocks have been under heavy pressure in recent weeks as investors rushed to sell AI-related stocks. But those who used leverage—through borrowed money or leveraged ETFs—have suffered much steeper losses, turning a chip sell-off into a broader market rout.
Why leveraged AI chip ETFs fell much more
The iShares Semiconductor ETF (SOXX), which tracks chip stocks, has dropped about 25% from its June 22 peak. The Direxion Daily Semiconductor Bull 3X Shares (SOXL), a leveraged semiconductor ETF, has plunged nearly 63% over the same period, according to Yahoo Finance.
Since SOXL is a 3x leveraged ETF, many investors assumed it should simply lose three times whatever SOXX lost. SOXL did not malfunction. The ETF is designed to deliver three times the DAILY return of the NYSE Semiconductor Index—not the return over weeks or months.
The fund resets its leverage at the end of every trading day. That means every new day’s gains or losses start from a different base value. Because of this daily reset, long-term returns can be very different from simply three times the index’s performance.
When markets swing up and down every day, the daily reset causes losses to compound faster. Even if the overall market does not fall dramatically, leveraged ETFs can lose much more because of this compounding effect. Yahoo Finance said leveraged products can perform extremely well when semiconductor stocks rise steadily. But they become risky during volatile sell-offs or sideways markets.
A 25% loss in SOXX requires roughly a 33% gain just to recover. But SOXL would need an enormous rally of around 170% after falling 63% to get back to its previous level.
South Korea’s recent market turmoil shows how leverage can accelerate a sell-off once prices begin to fall.
South Korea’s AI stock crash shows leverage risks
South Korea’s stock market plunged again as the AI-driven rally turned into a severe market sell-off. Retail investors who had borrowed money to buy AI-related stocks suffered the biggest losses.
The KOSPI index fell as much as 12.6% during trading before closing down 6%. It followed an almost 11% crash the previous day. The index has now lost almost 40% from its peak reached just over a month ago.
During the AI boom, many retail investors borrowed money to buy chip stocks. That borrowing helped push prices even higher. Now the same leverage is making the decline much worse. As stock prices fell, brokers forced investors to sell positions because their borrowed investments no longer met margin requirements. These forced liquidations added even more selling pressure.
Finance Minister Koo Yun-cheol apologised for introducing single-stock leveraged ETFs. He admitted they “had not been considered carefully enough”, according to Reuters. Koo said officials are reviewing measures to stabilise markets, including changes to regulations governing leveraged ETFs.
Also read: Why Wall Street is questioning big tech’s AI spending ahead of Microsoft and Meta earnings
Experts explain why leverage worsened the sell-off
“It’s certainly a very crowded trade which is being unwound,” said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, via Reuters. “If you look at what is falling in the market, it has been the stocks in which you have the most leverage,” Benzimra said. “It’s very difficult to say when this selloff will end, but at the moment, it’s definitely not the trade where we want to be.”
“The fast money market is keen to derisk ahead of key hyperscaler earnings as well as the upcoming Fed rate decision…”. “Today’s price action suggests that the leverage within Korean equities remains high and a further unwind could be expected”, via Wee Khoon Chong, Asia-Pacific macro strategist at BNY, according to Reuters.
Why AI chip stocks are falling around the world
“The pullback reflects profit-taking and rising scrutiny of AI capex sustainability”, according to Toni Meadows, head of investment at BRI Wealth Management, via Reuters. “Valuations in semiconductor stocks had priced near-perfect demand… so was always going to leave stocks vulnerable…”
“I don’t think it has really anything to do with fundamentals as much as just repositioning of portfolios and just taking profits in stocks that have gone crazy,” said Chuck Carlson, CEO of Horizon Investment Services via Reuters.
Leverage worries spread to Wall Street
Goldman Sachs’ Tony Pasquariello said leverage has increased across the market through retail margin borrowing, leveraged ETFs and short-dated options. Reuters reported that major hedge funds have recently cut positions in top AI infrastructure companies.
“People got way overextended on these names”, according to Walter Todd, chief investment officer at Greenwood Capital, via Reuters. “There are a lot of people under the impression over the last couple of months that these stocks only go up. And if they borrowed money to buy the positions, then they (could be) getting called out of them.
The AI chip sell-off became much more severe because leverage amplified losses at every stage. Daily-reset leveraged ETFs, margin borrowing and forced selling created a chain reaction that deepened the decline, showing how leverage can quickly turn a market correction into a broader rout.