Summary of Key Points
A recent report from JPMorgan Chase highlights that the rise in stocks related to AI and semiconductors (especially memory chips) over the past year has been driven not only by improved industry profit forecasts but also by the continuous inflow of leveraged funds (such as leveraged ETFs, options, and margin accounts). However, as the market has shifted from a one-way upward trend to volatility, these leveraged instruments are beginning to unwind (de-leverage) through mechanisms like "volatility loss" and "automatic rebalancing," creating selling pressure. The memory chip sector has the highest leverage density (three times that of the overall market), making it the most vulnerable. The entire de-leveraging process is expected to take about three months. During this period, even if industry fundamentals (such as AI demand) remain strong, stock prices may continue to fluctuate until the leveraged funds have completely withdrawn.
Detailed Analysis
1. The "Hidden Trap" of Leveraged ETFs: Volatility Is More Harmful Than Wrong Direction
Many people think that a three-fold long position in an ETF means a 300% return if the underlying asset increases by 1%, but this only applies in a single day. JPMorgan Chase provides a clear example: Suppose an index falls by 10% on one day and then rises by 11.1% the next day, returning to its original level; however, a three-fold long ETF would fall by 30% on the first day and only rise by 33.3% on the second day, resulting in a net loss of 7%. This phenomenon is known as "volatility loss." Leveraged ETFs are designed to maintain their leverage ratio daily, which means they must buy high and sell low during periods of volatility, leading to additional losses. The larger the scale of the ETF, the faster it shrinks during market fluctuations, automatically reducing its leverage.
2. Why Have Memory Chips Experienced the Sharpest Decline? High Leverage Density
"Leverage density" refers to the proportion of a leveraged ETF's assets relative to the total market value of the underlying stocks. The memory chip sector has a leverage density of nearly 0.65%, three times the market average of 0.17%. In simple terms, the same level of de-leveraging (such as a decline in net asset value or redemptions) would have a much greater impact on memory chip prices. This explains why the memory chip sector has suffered more severe losses than other tech stocks; it's not due to a sudden drop in demand but rather the concentrated withdrawal of leveraged funds.
3. Multiple Types of Leveraged Funds Are Unwinding Together, Creating a Vicious Cycle
Not only leveraged ETFs but also hedge funds, retail options, and margin accounts are de-leveraging:
- Retail option trading reached record levels in June but has since cooled down, although it has not yet returned to a safe range.
- The leverage in margin accounts remains at historically high levels, with only a slight reduction.
- Hedge funds have also begun to reduce their exposure to the semiconductor sector.
These factors work together in a vicious cycle: declining stock prices lead to increased volatility, forcing these funds to reduce their positions, which in turn causes further price declines. Even if everyone believes in the long-term prospects of AI, the behavior of adding leverage during downturns only prolongs market volatility rather than leading to a quick liquidation.
4. The De-Leveraging Process Will Take Three Months: Don't Rush to Buy on Fundamentals
JPMorgan Chase predicts that it will take another three months of market volatility for leveraged ETFs to return to their pre-April levels. During this time, even if demand for AI-related hardware (such as HBM memory) remains strong, stock prices may continue to fluctuate, with gains in earnings not necessarily translating into price increases, due to the unresolved structural issues in the funding landscape.
Key Tip: The real buying opportunity is not when there are impressive financial results but when leveraged funds have completely withdrawn (for example, when retail option trading returns to historical lows and margin leverage normalizes). Buying too early, before these conditions are met, could result in losses due to continued market volatility.
In One Sentence
The industry's fundamentals have not changed, but the leverage that drove up stock prices is now having the opposite effect, causing market turmoil. During this period, focus on whether leveraged funds have been unwound rather than on fundamental indicators.