JPMorgan says leveraged ETFs worsened Friday's Wall St selloff
![Item 1 of 2 JPMorganChase sign at the firm's headquarters at 270 Park Avenue in the Midtown area of New York City, U.S., September 9, 2025. REUTERS/Shannon Stapleton [1/2]JPMorganChase sign at the firm's headquarters at 270 Park Avenue in the Midtown area of New York City, U.S., September 9, 2025. REUTERS/Shannon Stapleton Purchase Licensing Rights, opens new tab](/_next/image?url=https%3A%2F%2Fwww.reuters.com%2Fresizer%2Fv2%2FRQXY6MD2URKNNNGILXYVRJLBHM.jpg%3Fauth%3Dc6cc750eb949ae44119e413243de7f1ed850608c0334671c0e6959d133af0f17%26width%3D1200%26quality%3D80&w=1920&q=75)
News Summary
Large-scale selling of leveraged Exchange-Traded Funds (ETFs) significantly contributed to Friday's U.S. stock market rout, according to a report from JPMorgan's Americas equities derivatives strategy team. The report estimated that approximately $26 billion in selling from leveraged ETFs at Friday's close drove the market even lower, following an initial sell-off triggered by U.S. President Donald Trump's threats of new tariffs on China. This sell-off came after a period of intense interest in leveraged products, with asset managers expanding their offerings to attract customers betting on volatile stocks like Tesla. Equities rebounded on Monday after President Trump softened his stance on the U.S.-China trade war, though safe-haven gold hit new record highs, indicating persistent uncertainty. Tom Bruni of StockTwits noted that there are now about 900 leveraged products, accounting for 33% of new ETFs but only 1% of the U.S. ETF industry's $12 trillion in assets. ETF issuers are also filing applications for new 3x leveraged single-stock products, despite the SEC currently approving a maximum of 2x leverage. This trend occurs even after GraniteShares closed a Europe-based 3x inverse Advanced Micro Devices (AMD) ETF, which was wiped out when AMD shares surged 38% in a single day.
Background
In 2025, the U.S. stock market demonstrates high sensitivity and volatility, particularly in response to external events such as U.S. President Donald Trump's tariff threats. Market sentiment is easily swayed by geopolitical and trade policy shifts, especially amidst ongoing U.S.-China trade tensions. Leveraged ETFs, designed to amplify daily returns of underlying assets, have increasingly attracted investors seeking high-risk, high-reward opportunities. However, these products achieve their leveraged objectives through derivative markets (like swaps or options), creating significant risk-hedging pressures for options market makers during volatile periods, which can in turn exacerbate market movements. The U.S. Securities and Exchange Commission (SEC) currently limits single-stock leveraged ETFs to a maximum of 2x leverage.
In-Depth AI Insights
What role did leveraged ETFs play in the market downturn, and what potential vulnerabilities does this reveal in market structure? - JPMorgan's report suggests that leveraged ETF selling exacerbated, rather than initiated, the sell-off triggered by Trump's tariff threats. This indicates that leveraged ETFs act as an "accelerator" rather than a "detonator" during market shocks, with their mandatory rebalancing mechanisms adding selling pressure during declines. - The hedging activities of options market makers are a critical part of the leveraged ETF's negative feedback loop. As markets fall rapidly, market makers need to sell underlying stocks to hedge their options positions, further intensifying the downturn. This highlights the vulnerability of market depth and liquidity, which can quickly evaporate during extreme events, especially in an era dominated by high-frequency and algorithmic trading. What challenges do regulators face in balancing market innovation with systemic risk? - There's an inherent tension between market demand for higher-leverage products and regulators' concerns about investor protection and market stability. Despite the SEC's current cap on single-stock leveraged ETFs, issuers are still seeking to launch 3x leveraged products, indicating a market propensity to push or circumvent regulatory boundaries. - The collapse of GraniteShares' 3x inverse AMD ETF underscores the inherent risks of high-leverage products during extreme market volatility, demonstrating that even sophisticated investors can incur substantial losses. This puts pressure on regulators to effectively manage and warn of potential systemic risks while allowing innovative products to meet market demand. Beyond short-term volatility, what are the deeper implications of leveraged ETF growth for long-term market behavior and investor education? - The rapid growth of leveraged ETFs (accounting for 33% of all new ETFs) suggests an increasing prevalence of speculative trading seeking quick short-term returns. This can lead to retail investors being overexposed to market volatility without fully understanding the products' complexities and risks. - This trend may shift market focus towards short-term price movements rather than long-term fundamentals, increasing market noise and potentially distorting price discovery mechanisms. For regulators and the industry, enhancing investor education and emphasizing the risks and complexities of leveraged products is crucial to address this long-term trend.