The fastest growing in the first half of the year was: global "leverage"

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The market surface appears calm, but under the water, powerful undercurrents are surging. In the first half of 2026, an unprecedented wave of leverage expansion is quietly evolving within the global financial system—from leveraged ETFs among retail investors, to institutional futures and total return swaps, and right up to the extreme stretching of dealer balance sheets; the leverage chain has extended to every corner.

Robert Quinn, a futures trading expert at Goldman Sachs, pointed out in his latest weekly report that this week has seen an "unprecedented" surge in stock financing costs, with dealer leverage hitting a mid-year historical peak. In September, the financing rate for S&P 500 TRFs once reached as high as the federal funds rate + 127.5 basis points. The CME S&P 500 Index Adjusted Rate Total Return Futures (AIT TRF)—a measure of US stock financing costs—has now climbed to its highest level since the end of 2024.

Andy Kent from the brokerage Kyte stated, "Leverage has become one of the central themes faced by investors, with margin debt running high and lending across the shadow banking system continuing to expand."

The potential risks of this leverage wave cannot be ignored. Bloomberg quoted market participants warning that the explosive growth of leveraged trading products, expansion of retail margin accounts, and the surge of hedge fund deposits with prime brokers are all building up systemic risk; if the financing spread causes any counterparty to falter, the entire leverage chain could suddenly reverse, triggering a chain decline in asset prices.

Leveraged ETFs and institutional positions resonate

The starting point of this round of leverage expansion is the frenzy among retail investors for leveraged and inverse ETFs. Currently, assets under management for such products are close to $200 billion, with a corresponding net exposure of about $400 billion. At the same time, trading volumes of leveraged ETFs are also seeing explosive growth.

Goldman Sachs points out that retail money rushing into leveraged ETFs has pushed dealers’ capacity to offer exposure to the hottest stocks—including SK Hynix, Samsung, and TSMC—to the limit, and dealers often rely on total return swaps (TRS) to meet this demand. Notably, the strong performance of a handful of bellwether stocks in the semiconductor and memory chip sectors has organically boosted the assets under management of related leveraged ETFs, further amplifying overall market exposure.

Institutional demand is just as robust. Goldman’s futures trading desk observes that, as market financing demand for information technology stocks far exceeds that for small cap stocks, the implied financing spread between S&P 500 and Russell 2000 index futures has risen to multi-year highs, reflecting the highly differentiated leverage demand across asset classes.

Asian demand as a driving force, with the Korean market especially prominent

Goldman's analysis points to another major driver of the recent spike in financing costs: Asia—especially the Korean market. Goldman describes the recent performance of the Korea Composite Stock Price Index (KOSPI) as "having evolved into a massive self-reinforcing feedback loop", underpinned by the continued accumulation of leveraged capital.

Although Korean regulators have tried to tighten control over total return swaps, these measures have had little effect and failed to effectively curb the runaway expansion of market leverage. Demand from retail investors via leveraged ETFs, combined with institutional positions established through TRS, has together pushed dealers' financing capacity to its limits.

Andy Kent characterizes the current situation as a "perfect storm": the rapid growth of leveraged ETFs, continued accumulation of long futures positions, capital occupation by IPO and ADR projects, and the expansion of prime brokerage business—all these factors combined have fueled an "explosive rise" in US market financing costs.

Risk hedging heats up, leverage chain facing reversal pressure

Facing both soaring financing costs and a tech stock valuation bubble, some investors have begun to seek hedging. Banks have observed significant trading flows from clients on both the long and short sides of major macro themes. Raphael Cyna, Head of Global Yield Structure at Bank of America, noted that investors initially bet on the “stagflation scenario”—stocks down, rates up—but some traders have since moved to position for “stocks down, rates down” recession hedges, viewing bonds as traditional safe-haven assets.

JPMorgan strategist Bram Kaplan recommends clients buy S&P 500 call options linked to rising rates to capture trading opportunities presented by the stock-bond correlation dropping to multi-year lows. Major banks are also continuously launching new variants of hybrid structured products to meet investors’ diverse hedging needs in a complex macro environment.

Goldman’s futures trading desk warns that, taking this May as a reference, financing costs may once again rise as quarter-end approaches. A deeper risk is that when dealer financing spreads are already at historical highs, if a counterparty cannot withstand the pressure or liquidity suddenly tightens, the entire leverage chain—from retail leveraged ETFs to institutional TRS and on to dealer balance sheets—could undergo violent, rapid compression, with risk assets unable to remain unscathed.

Risk warning and disclaimerMarkets have risks, so investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinion, viewpoint, or conclusion in this article is suitable for their particular situation. Investments made based on this information are at your own risk. ```