The recent AI-driven sell-off in South Korean equities has refocused market attention on one of the fastest-growing segments of retail investment: leveraged exchange-traded funds (ETFs).

While these products have long been a staple for day traders, this week's sharp volatility in shares of Samsung Electronics Co Ltd and SK Hynix Inc, coupled with the country's top market regulator expressing regret over allowing single-stock leveraged ETFs, has sparked a fresh investor review of whether such funds are exacerbating market swings.

The issue became more pressing on Tuesday when South Korea's benchmark Kospi index plunged 10%, triggering a global sell-off in semiconductor stocks and dragging down European and U.S. indices. Although few investors are directly blaming the drop on leveraged ETFs, strategists increasingly view them as part of a speculative mechanism that can magnify market volatility once momentum shifts.

Concern has grown in tandem with the unprecedented scale of leveraged ETF products. Data compiled by Bloomberg shows assets in leveraged ETFs now exceed $290 billion, with over $45 billion in Asia and more than $220 billion in the United States. Alexander Altmann of Barclays Equity Tactical Strategy estimates that rebalancing by U.S. leveraged ETFs has averaged around $20 billion per day over the past 10 trading sessions, roughly four times the average over the past year.

This explains why, during periods of intense market volatility, traders are paying closer attention to leveraged ETF flows alongside the activities of commodity trading advisors and volatility control funds. Strategists at Nomura estimate that leveraged ETFs now typically generate about $9 billion in rebalancing demand for every 1% move in the market.

These trades are largely mechanical adjustments that fund managers and traders must execute to maintain promised leverage levels. This process can add buying pressure in the later stages of a rally and increase selling pressure during a market decline.

"Leverage in the equity market creates a highly technical backdrop for risk," Altmann said. "Regardless of how you assess fundamentals, leveraged ETFs remain the biggest technical risk in this market."

Leveraged products have surged in popularity in recent years, with issuers offering tools that amplify bets on various assets, whether they rise or fall. Market observers have long debated whether these products offer more benefit or harm to retail investors. Asset managers argue they are simply meeting intense investor demand for high-return products, while critics warn that ordinary traders may overlook the fine print and risks of these highly leveraged funds, potentially leading to significant losses.

The scale of products designed to reflect speculative views has become large enough to influence trading across entire markets. The Korea Exchange has triggered circuit breakers four times so far this year, compared to none in 2025 and only once in 2024.