Margin debt hit a record $1.42 trillion in May, a 53.7% year-over-year surge. Leveraged ETF assets have swelled to $179 billion, with 85% concentrated in technology, artificial intelligence, and semiconductors.
Nomura strategist Charlie McElligott identified mechanical risks. Daily rebalancing from these ETFs created over $100 billion in net buying pressure last month, with $38.1 billion flowing into semiconductors alone. This forces funds to buy what is rising and sell what is falling, amplifying market moves.
The investor net credit balance plunged to a record low of negative $991.7 billion, indicating investors are overwhelmingly using borrowed funds. Significant surges in margin debt have historically preceded or coincided with major market peaks in 2000, 2007, and 2021.
If semiconductor stocks drop, leveraged ETFs must sell to maintain their targets, potentially creating a powerful downward spiral. The widening gap between soaring leverage and equity returns has historically rewarded caution.