Leveraged equity ETF assets fall sharply, raising volatility concerns

Feb 6 (Reuters) - Global stock exchange-traded funds that use leverage to magnify returns have seen sharp declines in assets this month, raising concerns that their trading to reduce exposure during market drops may be exacerbating the market selloff.

According to LSEG Lipper data, assets under management at 616 leveraged equity ETFs have fallen 7.2% so far in February to $146.7 billion as of Thursday. The decline echoes early 2025, when their net assets slid 17.2% in the first quarter.

Leveraged equity ETFs use derivatives such as options and swaps to magnify daily moves and rebalance positions at the end of each session. During sharp selloffs, falling market values can force funds to cut exposure, adding to selling pressure and amplifying volatility.

Analysts said leveraged ETFs intensified the recent Wall Street selloff, extending from last year when they were forced to sell billions of dollars worth of stocks after President Donald Trump's tariff threats.

Despite the risks, retail interest continues to grow. Morningstar data shows a record 228 leveraged equity ETFs were launched in the U.S. last year, more than five times the number introduced in 2024.