Wall Street Issues Chilling Warning: "Could End Up Like South Korea" as Leveraged 'Debt-Fueled' Investing Hits Record High

Wall Street is issuing a series of warnings as margin debt in the U.S. stock market has ballooned to a record $1.4 trillion.

The risks are further intensifying as trading in high-risk leveraged exchange-traded funds (ETFs), which track stock prices at two to three times the rate, is rapidly increasing.

The Wall Street Journal, citing data from the Financial Industry Regulatory Authority (FINRA), reported that the balance of margin debt—money borrowed by investors from brokerage firms to buy stocks—reached $1.4 trillion in May.

This is an all-time high, marking a 54% increase from a year ago.

Investments in leveraged ETFs are also growing rapidly.

According to market research firm FactSet, assets under management for leveraged ETFs nearly doubled to a record $220 billion between March 30 and June 3.

The products attracting the most capital were leveraged ETFs tracking tech and semiconductor indices, as well as companies like Tesla, Nvidia, and SpaceX.

The report highlighted a case where Micron Technology surged about 300% since late March, while the Direxion 3x Semiconductor Bull ETF skyrocketed by approximately 700%.

The media outlet noted that the risks of leveraged ETF investing could be seen in the recent sharp decline of the South Korean stock market.

In the South Korean market, where leveraged investments were concentrated on large-cap semiconductor stocks, a single drop in share prices caused significant volatility, triggering circuit breakers. The subsequent deterioration in investor sentiment then spread to U.S. AI-related stocks, the report explained.

It specifically pointed out that leveraged ETFs do not merely amplify investor gains and losses; they can structurally push up the underlying index during bull markets or exacerbate declines during downturns.

On June 5, a 3x leveraged semiconductor ETF plunged 31% in a single day, recording losses nearly three times the drop of the underlying index.

Market observers are concerned that as the size of leveraged ETFs grows, a "tail wagging the dog" phenomenon could occur, where ETF trading—rather than the ETF following the underlying assets—begins to drive the prices of the underlying assets themselves.

Dave Nadig, director of research at ETF Trends, warned, "The continued inflow of capital into single-stock leveraged products is the most concerning," adding, "As more capital is bought and sold mechanically regardless of price, market volatility is bound to increase."

Reported by Kim Minjeong | Video by Lee Ui-seon | Graphics by Lee Jeong-ju | Produced by SBS Digital News
※ Please note: This article was translated by AI and may contain errors.