Leveraged ETF derivatives fueled Friday selloff

JPMorgan analysts warn more ETF-related selling may follow

Leveraged ETFs among hottest new products in 2025

Oct 13 (Reuters) – Large-scale selling of leveraged exchange-traded funds contributed significantly to Friday’s U.S. stock market rout, according to a report published late on Sunday by JPMorgan’s Americas equities derivatives strategy team.

The report estimated that some $26 billion of selling from leveraged ETFs at Friday’s close drove the overall market even lower after threats by U.S. President Donald Trump that he would levy big new tariffs on China triggered an initial selldown.

That left options dealers in a position where they were likely to aggravate further downside moves as they looked to cover their own market exposure.

The selloff followed a period of intense interest in leveraged products, with many asset managers ramping up their offerings in a bid to attract customers looking to place bets on heavily traded and volatile stocks, including Tesla.

Equities rebounded on Monday after Trump softened his tone on the U.S.-China trade war, but safe-haven gold hit fresh record highs in a sign that uncertainty remained high.

Tom Bruni, head of markets and retail investor insights at StockTwits, calculates there are now some 900 leveraged products, accounting for 33% of all new ETFs but only 1% of the U.S. ETF industry’s $12 trillion in assets.

A spokesperson for JPMorgan declined any further comment on the report.

“We’d seen customers selling volatility going into Friday in general, and that came back to bite them,” said Steve Sosnick, market strategist at Interactive Brokers. “There are plenty of potential culprits, whether that approach to volatility came through leveraged ETFs” or some other trading strategy.

NEW LEVERAGED ETF PRODUCTS

Meanwhile, an array of ETF issuers are filing applications with regulators to roll out new products with 3x leverage levels on individual stocks.

Until now, the SEC has approved single-stock leveraged ETFs with a maximum of 2x leverage, meaning that the issuer seeks to deliver 200% of the daily price change in the underlying stock.

To deliver those returns, managers turn to the swaps or options markets; those options market makers in turn must manage their risk in rapidly moving markets.

GraniteShares, whose 2x ETF tied to Nvidia now has $4.8 billion in assets, has filed for 3x products on “dozens” of underlying stocks, CEO Will Rhind told Reuters.

“It’s a competitive thing,” Rhind said. “We’re responding to trends in the market and indications that this is what people want to see.”

That is in spite of the fact that last Tuesday GraniteShares closed down a Europe-based ETF that offered 3x the inverse of a move in Advanced Micro Devices. AMD’s shares rallied 38% in a single day, wiping out the value of the $3 million fund.

“The product did what it was supposed to do,” Rhind said. (Reporting by Suzanne McGee; Editing by Alden Bentley and Jamie Freed)