Andrew Bailey Warns G20 That Retail Investors Buying Leveraged ETFs Could Worsen Market Sell-Offs

Andrew Bailey has warned the world's major economies that rising leverage and concentrated investment strategies could amplify a future market fall. Bailey is Governor of the Bank of England and Chair of the Financial Stability Board (FSB). The warning came in a letter dated 28 August and published by the FSB on 31 August, ahead of the G20 finance ministers' and central bank governors' meetings in Asheville, North Carolina, on 31 August and 1 September.

His concern includes the growing use of leveraged exchange-traded funds (ETFs) and momentum-driven strategies, including among retail investors. These funds use financial instruments to seek a multiple of an underlying index's or share's daily return, magnifying both gains and losses.

Bailey focuses on how these funds operate, not who buys them. A leveraged ETF typically rebalances its exposure each day, which can lead it to buy more as prices rise and sell as prices fall. That can amplify market volatility during a sharp decline. In other words, leverage can reinforce rising markets but can also intensify declines when sentiment turns. Bailey said recent weeks had demonstrated that second effect.

Who Is Trading Leveraged ETFs

The Bank of England published figures on leveraged funds in July. Its Financial Stability Report put US leveraged equity ETF holdings at about $200 billion (£148 billion), against about $15 trillion (£11 trillion) in unlevered equity ETFs. That makes them small next to the wider market, but the Bank said their use of leverage can amplify price moves beyond what their size alone might suggest. It also said retail investors, meaning individual investors rather than large institutions, are the main holders of these funds.

The number of these funds has grown quickly. Morningstar counted 355 leveraged single-stock ETFs in the US in February, with all but 80 launched since January 2025. Bryan Armour, Morningstar's director of ETF and passive strategies research for North America, told Reuters the growth showed 'growing reliance on speculation.'

A study co-authored by Direxion, a provider of leveraged ETFs, along with Vanda Research and The Compound Insights, found that nearly 90 per cent of trading in leveraged single-stock ETFs came from individual investors. Trading in these funds accounted for 8 per cent of total trading volume on US exchanges in 2025.

What an AI-Driven Market Correction Could Mean for Britain

Bailey also links leveraged trading to the rise of artificial intelligence (AI) shares. AI-related companies now account for about half of the S&P 500, a major US share index. That share was about a quarter in 2022, Bank of England figures show.

If highly leveraged positions are concentrated in a small number of AI-related shares, a sharp fall could trigger losses and forced reductions in those positions. Bailey's letter warns that high prices, heavy leverage and crowding into the same shares could make a future fall worse.

The Bank of England also modelled what a worldwide fall in AI shares would mean for Britain. In its hypothetical scenario, US equity prices fall 45 per cent over six quarters. UK GDP would be 2.2 percentage points below its baseline, with most of the effect transmitted through financial channels. This is a stress-test scenario, not a prediction. The Bank said UK banks were resilient in stress tests that encompassed shocks of this scale.

What Bailey Warned the G20 About

Bailey sent his letter to finance ministers and central bank governors meeting in Asheville, North Carolina. His main concern is that several risks could hit at once and feed one another. Much of the letter focuses on a separate risk: how advanced AI models could increase cyber risks across the financial system. Bailey said work is underway on both issues. He has chaired the board since July 2025 while also running the Bank of England.

One argument runs the other way: leveraged funds still represent only a small part of the market. The Bank of England said an equity shock on its own would be unlikely to pose a direct risk to UK financial stability.

The warning is about what could happen to the wider market when leveraged and crowded positions reverse. The concern is that several market pressures could reinforce one another during a sharp decline. That could make a future correction more disruptive than the initial fall alone suggests.

A leveraged ETF cannot simply ignore a rapidly falling market. Its leverage and daily rebalancing requirements can lead it to reduce positions as prices fall. That can turn individual trades into an additional source of market volatility. Bailey's letter calls for greater resilience and preparedness. Whether the concerns prove justified will depend on how markets behave during the next major sell-off.

Disclaimer: Our digital media content is for informational purposes only and does not constitute investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks, and past performance does not guarantee future returns.