The US stock market is experiencing an unprecedented surge in ETF trading activity. Against the backdrop of ongoing geopolitical tensions, both the proportion of ETF trading volume and short-selling activity are approaching historical extremes.

According to the latest data from Goldman Sachs Prime Brokerage, the single-day increase in short positions for US-listed ETFs on Friday marked the second-largest daily jump in Goldman's records, surpassed only by the "Tariff Day" of April 2, 2025. Simultaneously, over the past nine trading sessions, ETF trading volume has consistently accounted for more than 35% of the overall market turnover, representing the second-longest consecutive streak in Goldman's dataset.

Notably, during the previous occurrence of a similar consecutive record, the VIX index was above 70. The current volatility level is significantly lower than that period, a divergence that has raised deep concerns among market participants.

Goldman Sachs' chief US trader, John Flood, warned in an interview with Bloomberg that the total leverage ratio for hedge funds is currently near an all-time high of 307%, driven by persistent short-selling (hedging) via ETFs. This implies that any positive signal on the geopolitical front could trigger an extremely sharp short squeeze at the index level. "If news emerges announcing an end to the conflict, the index could surge straight up by 2% to 3%, with a large portion of that coming from short covering in macro products," he said.

ETF short-selling is nearing historical extremes. Data from Goldman Sachs Prime Brokerage shows that against a backdrop of heightened market volatility and persistent geopolitical tensions, the single-day increase in short positions for US-listed ETFs reached +10%, the second-largest daily increase since records began in 2016. In the previous week, ETF shorts had already risen by +8%, climbed another +12% this week, resulting in a cumulative monthly increase of +23%.

From a broader perspective, when measured by the proportion of macro product (combining indices and ETFs) short exposure relative to the total US market value in the Prime book, the current level has risen to its highest since September 2022. It sits at the 97th percentile of the five-year historical data, approaching the five-year high.

In terms of trading volume, the market share of ETFs is also hitting records. Goldman Sachs data indicates that over the past five years, ETFs have averaged 28% of daily nominal trading volume. In 2026, this proportion has increased to 32%. On the most volatile single day recently, the share of ETF trading volume approached 40%, which Goldman describes as "near historical records."

The risk of a short squeeze is highly concentrated, and market liquidity is under strain. The rapid expansion of ETF short-selling is building extreme right-tail risks for the market. John Flood pointed out that the total leverage ratio for hedge funds is near the historical peak of 307%, primarily driven by continuous short-selling (hedging) conducted through ETFs. Should there be a clear signal of easing geopolitical tensions, short covering could trigger sharp price movements at the index level.

The market has already seen a preview recently. After former President Trump suggested the Iran conflict would be resolved "soon," the S&P 500 index closed up 0.8% that day, after having fallen as much as 1.5% intraday. Traders attributed this reversal mainly to market participants covering their previously established short ETF positions.

Concurrently, market liquidity is deteriorating sharply, approaching levels seen during the "Tariff Day" crash of 2025. Goldman Sachs estimates that the order book depth for E-mini S&P 500 futures is currently around $4 million, significantly below the historical average of approximately $14 million. A level below $7 million is typically considered a signal of market stress. "This means that whenever institutions try to buy or sell in size, the price impact will be much greater," Flood said.

While institutions are hedging heavily via ETFs, the buying power of retail investors, who had been a major source of market demand, is noticeably waning. According to the latest J.P. Morgan Retail Radar report, since the outbreak of the Iran conflict, retail investors have shown "persistent signs of weakness," with weekly buying volumes down about 30% compared to earlier levels. Previously, retail investors had been buying consistently against seasonal trends for several consecutive months, with February's buying volume reaching the third-highest level on record.

At the ETF level, retail investors have cut their weekly net inflows into ETFs by 22%, breaking a stable support trend that had lasted for three months. Single-stock purchases have also contracted, with Monday seeing the largest net selling of single stocks in nearly a month. Although there was some recovery on Tuesday and Wednesday, levels remained below the year-to-date average.

John Flood commented on this, stating that if the job market shows substantial deterioration, retail support risks further disintegration. "If we start to see multiple negative employment reports, that would be concerning. Retail buying could retreat, and the market could see selling," he said, adding that a single weak non-farm payrolls report alone is currently insufficient to draw that conclusion.

Goldman Sachs' bottom-line assessment is that positive developments in geopolitics could trigger a sharp stock market rally, but if the situation remains unresolved for an extended period, market pressure will continue to intensify. "The market is hoping to see some sign of resolution within the next two weeks," Flood said, "but if this state persists for longer without positive progress, we will face a serious problem at the index level."