The sharp selloff that rattled Wall Street on Friday was exacerbated by leveraged exchange-traded funds (ETFs), according to a new report by JPMorgan’s Americas equities derivatives strategy team.
The bank estimated that roughly $26 billion in leveraged ETF-related selling hit U.S. equity markets during the session’s close, intensifying the slide that had already been triggered by escalating U.S.-China trade tensions.
Leveraged ETFs Amplified Market Downturn
According to JPMorgan analysts, leveraged ETFs — financial instruments designed to magnify daily market moves — fueled much of the late-day volatility.
The wave of selling was set off after President Donald Trump threatened new tariffs on Chinese imports, rekindling fears of another trade war between the world’s two largest economies.
The initial panic selling soon turned into a feedback loop as options dealers and leveraged ETF managers rushed to rebalance their positions, amplifying downside pressure.
“Some $26 billion of leveraged ETF selling at the close likely worsened the decline,” the JPMorgan report noted.
This created a situation where options dealers had to hedge aggressively, worsening liquidity and accelerating losses as they covered exposure across index futures and derivatives markets.
Analysts Warn More ETF-Driven Selling Could Follow
The report cautioned that further ETF-related selling could emerge in the coming days if volatility remains elevated.
Leveraged ETFs, which aim to deliver two or three times the daily returns of their underlying indexes or stocks, require constant rebalancing through derivatives markets, especially during sharp swings.
Market strategist Steve Sosnick of Interactive Brokers said that volatility sellers “got caught off guard” last week.
“We’d seen customers selling volatility going into Friday in general, and that came back to bite them,” Sosnick explained. “Whether that exposure came through leveraged ETFs or other products, the result was the same — a scramble to hedge.”
Leveraged ETFs Booming Despite Volatility Risks
The recent selloff comes amid a boom in leveraged ETFs, one of the hottest investment product categories in 2025.
According to Tom Bruni, head of markets and retail investor insights at StockTwits, there are now nearly 900 leveraged ETFs listed in the U.S., representing 33% of all new ETF launches this year.
However, these funds account for only about 1% of the $12 trillion U.S. ETF industry, highlighting their niche — yet powerful — impact during volatile trading sessions.
Leveraged ETFs use complex derivatives such as swaps and options to amplify daily returns.
But during extreme market swings, this structure can trigger forced buying or selling, distorting underlying market behavior — a dynamic that analysts say was on full display during Friday’s rout.
GraniteShares and the Race Toward Higher Leverage
In the midst of rising demand for speculative trading tools, several ETF issuers are seeking approval to offer new 3x leveraged products tied to individual stocks.
Currently, the U.S. Securities and Exchange Commission (SEC) permits single-stock leveraged ETFs with up to 2x leverage, meaning they seek to deliver 200% of the underlying stock’s daily performance.
But companies like GraniteShares are pushing the limits. The firm’s 2x leveraged ETF linked to Nvidia (NVDA.O) has already amassed $4.8 billion in assets, and CEO Will Rhind confirmed that GraniteShares has filed applications for 3x leveraged ETFs on dozens of additional stocks.
“It’s a competitive thing,” Rhind told Reuters. “We’re responding to what investors are asking for.”
However, Rhind acknowledged the risks involved. Only days earlier, GraniteShares had to close a Europe-based 3x inverse ETF tied to Advanced Micro Devices (AMD.O) after AMD’s stock surged 38% in a single day, completely wiping out the fund’s $3 million in assets.
“The product did what it was supposed to do,” Rhind said — underscoring how leveraged ETFs can both reward and destroy capital at lightning speed.
Wall Street Rebounds — But Uncertainty Lingers
Following the selloff, U.S. equities rebounded on Monday after President Trump softened his stance on tariffs, hinting at possible trade negotiations with China.
However, safe-haven gold prices hit new record highs, signaling persistent caution among investors.
Analysts say the events of the past week are a wake-up call for both regulators and retail investors.
The explosive growth of leveraged ETFs has provided new trading opportunities, but it also poses systemic risks during periods of heightened volatility.
As JPMorgan’s report warns, “ETF-related rebalancing can create self-reinforcing feedback loops,” particularly in markets dominated by algorithmic and derivatives-based trading.
Key Takeaways
- $26 billion in leveraged ETF selling worsened Friday’s Wall Street decline.
- JPMorgan warns of continued ETF-related volatility.
- Leveraged ETFs now represent 33% of new ETF launches in 2025.
- GraniteShares and others are seeking approval for 3x leveraged stock ETFs.
- Gold hit record highs as investors sought safety amid renewed trade tensions.
Conclusion
The JPMorgan report underscores how leveraged ETFs — once niche trading tools — now play a major role in driving market volatility.
As financial innovation races ahead, the balance between investor demand, regulatory oversight, and systemic stability will determine whether leveraged ETFs remain a useful instrument or a potential market disruptor.
For now, the message from analysts is clear: when volatility surges, leverage cuts both ways.
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