AI market downturn deals heavy blow to speculative products, multiple ETFs plummet. Analyst: Using leverage is no different from "playing with fire."

This week, the sharp decline in tech stocks not only ended the hottest AI trading market of the year, but also exposed another side of modern financial market speculation mechanisms. When market sentiment reverses, high leverage investment products built around popular themes will also amplify the decline in sync. After retail investors concentrated on selling AI chip stocks, the semiconductor sector's decline quickly spread to Asian and American markets, not only devastating several leveraged ETFs, but also dragging down recently listed SpaceX-related funds. At the same time, Michael Saylor's company, MicroStrategy (MSTR.US), saw its stock price weaken, putting pressure on a series of investment products built around Bitcoin, impacting the cryptocurrency market. On the surface, the assets that suffered severe setbacks this week seem unrelated to each other, but in reality, they are all products of the same phenomenon in the current bull market - high leverage, high frequency, low threshold investment tools built around the hottest investment themes. In recent years, almost every market hot spot has spawned a complete financial product ecosystem, including leveraged ETFs, options, digital asset derivatives, and prediction markets. These products, although structurally different, share the common feature of helping investors bet on popular trades with higher leverage, faster speeds, and more concentration. Samuel Hartzmark, a behavioral finance professor at Boston College, stated that if retail investors generally wish to obtain high-risk, high-leverage investment tools, even if these tools may not necessarily be beneficial to investors, the market will continue to introduce related products to meet the demand. However, this week the market also demonstrated the power of this mechanism working in reverse. As investors began to leave leading AI stocks due to overvaluation, the financial products intended to amplify the uptrend also began to magnify the entire deleveraging process. South Korea's market became the most obvious example. Local retail investors in recent years have been keen on buying leveraged ETFs that provide double or even triple the daily returns of AI chip stocks. As the AI concept cooled down, several popular leveraged products in the local market saw cumulative declines of over 20% this week, once again highlighting how leveraged products can quickly amplify losses when trends reverse. The impact did not stop in Asia. Wall Street's latest hot topic, SpaceX (SPCX.US), also became a typical case. Leveraged funds related to SpaceX have attracted nearly $1 billion in inflows since their launch this month, but since issuance, these products have cumulatively declined by about 40%. Many investors who bought into the market at high prices after the IPO frenzy had actually entered the market after the uptrend had already been completed. According to data, the global assets under management of leveraged ETFs have exceeded $270 billion, with the United States accounting for over $200 billion, and Asia over $45 billion. With the continuous expansion of asset size, these products have become an important passive trading force in the market. Barclays pointed out that the recent rebalancing trading volume of leveraged ETFs in the United States has increased to several times the long-term average, and their mechanical buying and selling pressure is enough to have a significant impact on related stocks and indices. This week, benchmark stock indices in the US generally weakened, with the S&P 500 index falling by nearly 2% and the Nasdaq 100 index dropping by over 4%. Christopher Getter, portfolio manager at Simplify Asset Management, stated that the increasing variety of speculative products allows investors to easily bet on the future performance of a company without truly understanding its business model. He pointed out that in the case of SpaceX, the current market valuation already implies high growth expectations for the next few years, and the limited number of outstanding shares and potential technical fund flows from future index inclusions are continuously undermining the importance of traditional valuation systems. "When fundamentals once again become the dominant factor in the market, small and medium investors are likely to be the first to bear the brunt." Similar situations have also occurred in the cryptocurrency market. In recent years, Strategy has evolved from a simple publicly-traded company holding Bitcoin to an important platform for building financial products around Bitcoin investments. Investors can participate not only through common stocks but also through different instruments such as ETFs, preferred shares, etc., to bet on the same trading logic. When market sentiment reverses, these products are simultaneously sold off, further exacerbating the pressure on the digital asset market. The Strategy Long/Short Leveraged ETF launched in 2024 has attracted billions of dollars in inflows, but since its inception, it has cumulatively declined by over 90%. At the same time, the company's issued preferred stock price has fallen below face value, challenging the logic of investors hoping to participate in the Bitcoin market gains through fixed income products. Ellen Hazen, Chief Market Strategist and Portfolio Manager at F.L. Putnam Investment Management, stated that this phenomenon is the typical business model that Wall Street relies on during a bull market. "The market will continue to introduce products that cater to investor demand," she said, "Many financial products actually have no real necessity, but they can still be sold." Analysts believe that these products are not the fundamental reason for the market's decline this week, but they expose the fact that the current bull market is increasingly relying on a few hot themes, such as AI, single tech stocks, and digital assets. When more and more leveraged tools expand around the same investment logic, they are profoundly affecting investor sentiment, capital flows, and market pricing mechanisms, amplifying not only the uptrend but also the correction. James St. Aubin, Chief Investment Officer of Ocean Park Asset Management, stated that these products are continually adding a "casino" aspect to the market. "I hope these products will only attract a small number of investors, but from the flow of funds, it is clear that this group is rapidly expanding," he said. "Anyone using leverage should understand that they are playing with fire."