Wall Street Gamblers Are Devastated as Leveraged ETF Losses Reach 40%.

• Selling Pressure Increases Following Disappointing Economic Reports
• Crypto-related Bets Particularly Hard Hit

They were at their peak during the rise: high-risk, high-reward exchange-traded funds (ETFs), mass-produced by Wall Street product managers during the market euphoria following the elections. Now, these speculative products are hitting their holders hard, as a series of disappointing economic reports and concerns about U.S. trade policy have put a brake on risk tolerance in the markets. From leveraged bets on highly valued tech companies to exotic options and all kinds of cryptocurrency bets, the sell-offs that have sent major U.S. stock indices down for four consecutive days are most felt in peripheral ETFs popular among retail traders. In a stark example, two leveraged ETFs related to Michael Saylor’s Bitcoin storage company Strategy, which were once worth over $5 billion, have dropped by about 40% in three days. Leveraged funds promising double daily returns on Nvidia Corp., Tesla Inc., and Amazon.com Inc. have also experienced declines. Triple-leveraged bets on innovation and semiconductor stocks have fallen by 20%. “Momentum can work great when it’s in your favor, but when it’s not, you need to be careful,” said Max Wasserman, senior portfolio manager at Miramar Capital. “It’s like catching a falling knife.”

Determining the immediate catalyst for the sell-offs is difficult, but selling pressure significantly increased on Friday after reports on existing home sales, consumer confidence, and business activity fell short of forecasts. On Tuesday, the Conference Board stated that U.S. consumer confidence fell this month by the most since August 2021 due to concerns about the broad economy’s outlook, adding evidence that uncertainty surrounding the Trump administration’s policies is weighing on households. Products traded on exchanges, like those linked to Nvidia, use derivatives to enhance returns or provide inverse returns and have been affected by previous market shocks. Still, retail traders rush toward them, drawn by the promise of large gains. They remain a small but rapidly growing part of the equity universe, with most focusing on bullish bets. Analysis showed that earlier this month, around $95 billion in assets were in products using derivatives for long bets on individual stocks or indices, while strategies betting on declines held $9 billion. While nothing in the behavior of these funds has been surprising lately—they are designed to provide enhanced market exposure regardless of what happens—their popularity has the potential to increase their influence on sentiment.

This is a risk that is becoming increasingly apparent with the growth of crypto and related securities, says Peter Tchir of Academy Securities. “Greed. The stocks that move the most attracted aggressive investors who wanted to use leverage,” he said. “The inability will be concentrated on some of the big winners, which aggressive money quickly entered through leveraged ETFs on individual stocks.” Not only leveraged products took a hit—plain bets on tech companies and other potential innovators are also suffering. The “Magnificent Seven” mega-cap index dropped by as much as 3.4% on Tuesday. Cathie Wood’s ARK Innovation ETF, valued at $6.2 billion (ticker ARKK), a favorite among retail traders, fell by as much as 6.7% on Tuesday. Declines in several speculative tech companies led the fund lower, driven by Elon Musk’s Tesla, its largest holding, along with Roku Inc. and Palantir Technologies Inc. Its main ETF is on track for a 14th consecutive month of outflows, bringing assets under management across its actively managed ETF portfolio down to about $12 billion, far from the $60 billion it held four years ago. “There’s no doubt that the animal spirits in the market are waning. This started last week with declines in stocks like Palantir, Tesla, and Meta,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Now we’re seeing it with the big declines in Bitcoin.”