Wall Street sounds alarm as US margin debt hits record $1.4 trillion; Korea cited as cautionary tale

Borrowed investment in US markets has swelled to record levels, amplifying Wall Street warnings about excessive leverage. Surging margin loans and leveraged exchange-traded fund investments are stoking fears that the buildup could magnify market volatility.

The Wall Street Journal reported Sunday, citing data from the Financial Industry Regulatory Authority, that the outstanding balance of US investors' margin loans reached $1.4 trillion in May — a 54 percent increase from a year earlier and an all-time high.

The leveraged ETF market is expanding just as rapidly. According to market research firm FactSet, assets under management in leveraged ETFs nearly doubled between March 30 and June 3, reaching a record $220 billion.

The products drawing the most capital were leveraged ETFs tracking technology and semiconductor indexes as well as individual names including Tesla, Nvidia and SpaceX.

The Journal highlighted how a Direxion triple-leveraged semiconductor ETF surged roughly 700 percent while Micron Technology climbed about 300 percent since late March. It also noted the flip side: a 30 percent drop in the underlying asset can translate into roughly a 90 percent loss for a triple-leveraged ETF.

The Journal particularly singled out the recent sharp selloff in South Korea's stock market as a cautionary example of leveraged ETF risk. In the Korean market, where leveraged bets had concentrated heavily in large-cap semiconductor stocks, prices swung so violently that circuit breakers were triggered, and the resulting deterioration in investor sentiment spread to US AI-related stocks.

The Journal also said leveraged ETFs do more than simply amplify investors' gains and losses — they can actively push up underlying share prices. To maintain their target return ratios, fund managers buy additional derivatives such as futures, and the financial firms that sell those derivatives in turn purchase the underlying shares to hedge their exposure, creating self-reinforcing mechanical buying pressure.

According to Barclays, leveraged ETF managers have purchased roughly $300 billion in derivatives since late March. The financial firms on the other side of those trades then bought large quantities of the related shares for hedging purposes, analysts said, further fueling the rally.

The dynamic works in reverse when prices fall: fund managers must sell their derivative holdings, and financial firms unwind their hedge positions by selling shares. Analysts warn this process can trigger a vicious cycle that amplifies any downturn.

"If we were to get into a situation where these very large positions needed to be unwound in a short period of time, that would be very concerning," Alexander Altman, Barclays' head of global tactical strategy, told the Journal, calling it "the largest non-discretionary risk in the market right now." The concern is not hypothetical: a triple-leveraged semiconductor ETF plunged 31 percent in a single session on June 5, recording a loss roughly three times the decline in its underlying index.

A broader worry is also taking hold: as leveraged ETFs grow larger, they may stop merely tracking the price of their underlying assets and instead begin driving those prices — a phenomenon sometimes described as the tail wagging the dog.

"The continued inflows into leveraged single-stock products are what concern me most," said Dave Nadig, head of research at ETF.com. "The more money that buys and sells mechanically regardless of price, the more volatility will inevitably expand across the market."

Experts believe demand for leveraged investment will likely persist for now as the bull market centered on AI and semiconductors continues. They cautioned, however, that the moment market direction shifts, margin debt and leveraged products could sharply amplify selling pressure — and urged investors to weigh the potential for heightened volatility alongside the prospect of outsized returns.