Leveraged ETFs suffer record $25.7B meltdown as retail traders take major hit

Leveraged ETFs experienced historic losses late last week, leaving retail investors in a brutal state as global trade tensions escalated to new heights. Over $25.7 billion was erased from leveraged ETFs in two trading sessions, which recorded the worst outflow on record for such high-risk instruments, as per the Financial Times.

This marked decline resulted from increased trade barriers under the Trump administration by implementing broad-ranging “reciprocal” tariffs that prompted selloffs in both traditional and digital markets. These include a 104% tariff on products from China that raised the possibility of a long-term economic slump and opportunities for global stock market instability.

Leveraged ETFs, which can generally mimic the index’s performance with up to five times the daily returns, suffered the most. These products have become popular among retail traders seeking high returns on their investments but have shown significant weakness during macroeconomic upheavals.

As Elisabeth Kashner noted, these are “very sharp knives,” and one needs to be very careful while using them. “They are to be used for very specific purposes, and the people that use them have to know what they are doing,” she said.

Single-stock leveraged funds hit hard

Some of the most severe declines in single-stock futures took place in the course of the two-day crash. The Ireland-listed Leverage Shares 4x Long Semiconductors ETP suffered the biggest loss, a decrease of more than 59%. Other leveraged funds, such as the Boeing, Arm Holdings, and Magnificent 7 technology stock funds, also fell by more than 50%.

Nasdaq-tracking ProShares UltraPro QQQ was the biggest loser with $20 billion assets under management. It shed $6.3 billion during the same period, which indicates that the tech sector is rather vulnerable to macroeconomic and geopolitical factors.

The ETF market’s collapse eclipsed previous selloffs, such as the pandemic panic in March 2020 and the “Volmageddon” volatility of 2018. Analysts also pointed out that some U.S. listed ETFs using leverage cannot be leveraged more than 3x their positions. At the same time, their counterparts in other markets can have more leverage, leading to much higher losses.

Bitcoin could benefit from global economic stress

While leveraged ETFs have struggled, analysts anticipate a recovery for Bitcoin (BTC) as other factors come into play. Although short-term declines led to BTC testing the $76,000 mark, experts have pointed to macroeconomic factors that may uphold Bitcoin’s status as a safe-haven asset.

Binance CEO Richard Teng claimed that Bitcoin might rise because it is a haven for investors who are in search of other safe assets. He noted the resilience of  BTC’s long-term holders and stated that short-term fluctuations could help spur further adoption of BTC and other coins.

“This environment could also accelerate interest in crypto as a non-sovereign store of value,” Teng noted.

Bitwise’s Head of Investment, Matt Hougan, agreed with this view. He noted that a declined dollar, which the imbalances in trade may expect, can cause an increase in Bitcoin prices in the short term.

Hougan saw a prospect in the future towards a more diversified system reserve. “Hard money like bitcoin and gold [may] play a bigger role than it does today,” he told investors.

VanEck’s Head of Digital Assets Research, Matthew Sigel, also chimed in and stated that the action taken by the Fed in addressing the economic drag from the tariffs might lead to a boost in cryptocurrencies. If inflation is controlled, the cuts can bring back the familiar conditions of high liquidity, traditionally favorable for Bitcoin’s growth.

However, even in the face of chaos, Trump did not appear to be changing his approach. Although he described the tariffs as “permanent,” he also said they were putting pressure on counterparts to enter into negotiations. His unpredictability has really caused more confusion in the already volatile markets.

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