Leveraged ETFs Were Set to Sell a Record $57 Billion in U.S. Stocks

Leveraged ETFs were set to sell a record $57 billion in underlying U.S. stocks during the Nov. 5 rout, one of several measures showing investors pulled back.

Leveraged ETFs needed to sell $57 billion in underlying U.S. stocks that day, the highest level in records dating to 2007. The amount describes sales of portfolio stocks by the funds, not sales of ETF shares.

During Oct. 12-16, leveraged equity ETFs attracted a record $9.5 billion in inflows while hedge funds made their steepest proportional cut to technology positions since 2016. The Nov. 5 estimate concerns required sales of underlying stocks, while the October figure measured investor flows into ETF shares.

Retail investors' U.S. stock selling in the first 90 minutes after the opening bell on Thursday ranked as the second-largest amount for that window since 2016.

Long-short hedge funds' net leverage fell 5% on Nov. 5, the fifth-largest one-day decline since 2010. The measure was in the bottom 10% of its historical range for the same period. Since June, active trading had cut the funds' total exposure by an amount equal to 10.7% of the market value of their holdings at June's end.

That was the largest such reduction in at least 10 years. The 5% figure captures a one-day change; the 10.7% figure compares a longer-term exposure reduction with a June-end valuation.

Funds were underweight AI stocks relative to their market-cap weight, though the stocks still represented 32% of their absolute exposure. The MSXXAI index defines the group as AI beneficiaries, AI-related power companies and major hyperscale cloud providers. The underweight measure compares the funds' AI allocation with the group's market weight, while the 32% figure represents its share of fund exposure.

Stock-trading correlations were also beginning to rise, typically indicating that risk reduction was spreading more broadly.