AI Leveraged ETFs in South Korea, the U.S. and Taiwan More Than Double in Two Months... Overheating Warning

[Financial News]  
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The size of leveraged exchange-traded funds (ETFs) betting on artificial intelligence (AI) in the stock markets of South Korea, the United States and Taiwan more than doubled in just two months.
According to CNBC on the 3rd local time, the result came from Goldman Sachs' analysis of leveraged ETFs tracked by EPFR in the United States (573 funds), South Korea (52) and Taiwan (11).
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U.S. leveraged ETFs rose from $39 billion in April to $84 billion at the end of May, more than doubling in two months.
In South Korea and Taiwan, leveraged ETF assets surged more than 2.5 times over the same period, from $17 billion to $43.1 billion.
Christian Mueller-Glissmann, head of Goldman Sachs Asset Allocation Research, pointed to the AI trade as the driver behind the surge in leveraged ETFs across the three countries in a research note. The United States is home to the originators of AI models, while Taiwan hosts TSMC, which produces GPUs (graphics processing units). In South Korea, Samsung Electronics and SK hynix supply memory chips.
Mueller-Glissmann explained, "Investors are increasingly expanding their use of leveraged financial instruments tied to the 'AI trade.'" He added, "Assets in AI- and tech-related leveraged ETFs exposed to the United States, South Korea and Taiwan have surged in recent months, more than doubling."
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The rapid expansion of AI-related leveraged ETFs in the three countries, which sit at the core of the AI supply chain, is helping lift related stocks. At the same time, it also highlights the severe risks embedded in the AI rally.
Returns can double or even triple in a single day, but losses can be just as severe.
If investors suffer large losses and pull back from the AI trade, ETF inflows could quickly turn into outflows, and the pace of withdrawals could be even more aggressive than the pace of inflows.
Adam Crisafulli, founder of Vital Knowledge, said, "Given the intensity of the AI frenzy, it is no surprise that investors have reached for leverage." He added, "That is common behavior in every bull market."
Crisafulli, however, noted that while AI is driving sharp revenue gains for many companies, only a small number of firms, such as memory chip and semiconductor makers, are actually generating profits and making money.
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In particular, the boom in leveraged ETFs in South Korea and Taiwan has at times pushed their market sizes past some Western markets. That is because the most important semiconductor companies in the AI ecosystem are concentrated there.
SK hynix, Samsung Electronics and Taiwan's TSMC each account for more than 40% of their respective benchmark indexes, the KOSPI and the Taiwan Weighted Index.
Crisafulli warned that while enthusiasm around AI will likely continue to drive steady inflows, the current pace of the rally may be difficult to sustain.
He said, "It is highly likely that the rally has now entered unsustainable territory." He added, "Stocks such as Dell doubled in just a few days. Such extreme parabolic price action usually cannot last."
dympna@fnnews.com Song Kyung-jae Reporter