A recent report from JPMorgan Chase & Co. has identified significant selling pressure from leveraged exchange-traded funds (ETFs) as a key factor that intensified a major U.S. stock market selloff last Friday. The analysis suggests these complex financial products contributed to market instability during a period of heightened volatility.
Analysts from the bank's Americas equities derivatives strategy team estimated that approximately $26 billion in selling from leveraged ETFs occurred at the market close. This wave of selling amplified an initial downturn triggered by geopolitical trade tensions, potentially creating a feedback loop that pushed the market lower.
Key Takeaways
- JPMorgan analysts report that $26 billion in selling from leveraged ETFs significantly worsened last Friday's stock market decline.
- The selloff was initially triggered by concerns over new U.S. tariffs on China, but leveraged products amplified the downward move.
- The growth of leveraged ETFs, which use derivatives to magnify daily returns, is introducing new layers of risk into the market.
- ETF issuers are now seeking regulatory approval for even higher-risk products, including 3x leveraged single-stock ETFs.
JPMorgan Details Impact of Leveraged Products
According to the JPMorgan report published over the weekend, the selloff from leveraged ETFs was a substantial contributor to the market rout. The initial decline began after U.S. President Donald Trump announced potential new tariffs on Chinese goods, creating uncertainty among investors.
However, the selling pressure from these specialized ETFs at the end of the trading day drove the market down further. This type of coordinated selling is a structural feature of how leveraged funds operate. To maintain their target exposure, they must sell assets when the market falls and buy when it rises, which can magnify market swings.
Understanding Leveraged ETFs
Leveraged ETFs are designed to provide a multiple (such as 2x or 3x) of the daily return of an underlying index or stock. They use financial derivatives like swaps and options to achieve this amplification. Because they reset daily, their long-term performance can differ significantly from the underlying asset, making them primarily suitable for short-term trading.
The report also highlighted a secondary effect involving options dealers. As leveraged ETFs unwound their positions, options dealers who provide the derivatives for these funds were forced to adjust their own market exposure. This hedging activity often involves selling into a falling market, which can create a domino effect and accelerate declines.
A Growing Market Segment
The market volatility comes amid a period of intense investor interest in leveraged financial products. Asset managers have expanded their offerings to meet demand from traders looking to make amplified bets on popular and often volatile stocks, such as Tesla and Nvidia.
Despite their growing popularity, these products represent a small fraction of the overall ETF market. According to Tom Bruni, head of markets and retail investor insights at StockTwits, there are now around 900 leveraged products available to investors.
Leveraged ETFs by the Numbers
- Total Products: Approximately 900
- Share of New ETFs: 33%
- Share of Total U.S. ETF Assets: 1%
- Total U.S. ETF Industry Assets: $12 trillion
While they account for one-third of all new ETFs launched in 2025, they hold only 1% of the U.S. ETF industry's total $12 trillion in assets. This indicates that while they are a niche market, their concentration and trading mechanics can have an outsized impact on daily market volatility.
"We'd seen customers selling volatility going into Friday in general, and that came back to bite them. There are plenty of potential culprits, whether that approach to volatility came through leveraged ETFs or some other trading strategy."
Steve Sosnick, a market strategist at Interactive Brokers, noted that strategies involving betting on low volatility were widespread before the selloff. The sharp market move caught many traders off guard, forcing them to unwind positions and contributing to the downward pressure.
The Push for Higher Leverage
The demand for amplified returns is pushing ETF issuers to develop even more aggressive products. Several firms have filed applications with the U.S. Securities and Exchange Commission (SEC) to launch single-stock ETFs with 3x leverage levels.
Currently, the SEC has only approved single-stock leveraged ETFs with a maximum of 2x leverage. These products aim to deliver 200% of the daily price change in an individual stock. A move to 3x leverage would further increase both potential returns and potential losses.
The Risks of Amplified Bets
To achieve these high levels of leverage, fund managers rely heavily on the swaps and options markets. The options market makers who facilitate these trades must constantly manage their own risk, especially in fast-moving markets, which can contribute to the volatility feedback loops mentioned in the JPMorgan report.
Will Rhind, CEO of GraniteShares, told Reuters that the push for 3x products is a competitive response to market demand. His firm's 2x leveraged ETF tied to Nvidia currently has $4.8 billion in assets.
"It's a competitive thing. We're responding to trends in the market and indications that this is what people want to see."
However, the risks of these products are significant. Last Tuesday, GraniteShares was forced to close a Europe-based ETF that offered 3x the inverse of a move in Advanced Micro Devices (AMD). When AMD's shares surged 38% in a single day, the value of the $3 million fund was completely wiped out.
Rhind commented on the closure, stating, "The product did what it was supposed to do." This highlights the inherent design of such funds: they can deliver massive gains but also face the risk of total loss in extreme market conditions.
Market Outlook and Investor Caution
Although U.S. equities rebounded on Monday after President Trump moderated his stance on the trade dispute, underlying uncertainty remains. Safe-haven assets like gold continued to reach fresh record highs, signaling that many investors are still concerned about potential market instability.
The analysis from JPMorgan serves as a reminder of how the structure of modern financial products can influence market dynamics. While leveraged ETFs offer sophisticated tools for traders, their growth introduces new pathways for volatility to spread through the financial system, especially during periods of stress.
