One factor may keep chip stocks on a roller coaster for foreseeable future

Tech is dragging global stock markets lower Tuesday, with the sell-off driven primarily by chipmakers. Leveraged ETFs could keep volatility sky high in the near term. Leveraged ETFs use derivatives to give investors two-times, sometimes even three-times, exposure to a stock or a sector. Investors have recently turned to them to gain the most exposure to the artificial intelligence trade possible , particularly semiconductor names. Now, however, a perfect storm has brewed in global markets, with Google-parent Alphabet losing two key AI scientists and worries piling up about the high costs required for AI to expand. On top of that, regulators in South Korea, one of the key semiconductor markets in the world, have expressed concern with the rising popularity of leveraged ETFs, partly driving a 10% drop in the Korean Kospi index overnight. This has led Wall Street to pare positions related to AI — making leveraged ETFs a prime target for selling. "The cat is fully out of the bag that this SMH run is being fueled at this point by far more than even the most exuberant AI bulls," wrote strategists at Oppenheimer. The Direxion Daily Semiconductor Bull 3x ETF (SOXL) , which grants investors three-times exposure to the PHLX Semiconductor Index (SOX) , plunged nearly 20% in the premarket. The VanEck Semiconductor ETF (SMH) , meanwhile, shed 6%. In South Korea, the Csop Sk Hynix Daily 2x Leverage ETF tumbled 23.8%. …