AMD surged overnight, and the ETF that shorted AMD three times "went to zero overnight," reigniting "volatility panic."

AMD's stock price surged by as much as 38% on Monday, leading to the complete wipeout of GraniteShares' 3x short AMD exchange-traded product, ringing alarm bells for the increasingly hot leveraged ETF market. After the product's net asset value dropped to zero, it was forcibly liquidated, reminding the market of the brutal collapse of similar products during the "volatility panic" in 2018.

On October 9, according to media reports, this ETF, listed in London and Italy, aimed to provide three times the inverse return of AMD's stock price, managing approximately $3 million in assets before its closure. GraniteShares announced on its website that due to the net asset value dropping to zero, there would be no redemption payments, and trading of the product has been suspended and will be delisted according to exchange procedures.

Bloomberg Industry Research analyst Athanasios Psarofagis stated, this proves that 3x stock ETFs have a real risk of liquidation. Analysts warned that in the current fast-paced market environment, the liquidation of single-stock leveraged products is "almost inevitable," with the only question being when it will occur in the larger U.S. market.

This incident has reignited concerns about a repeat of the "volatility panic," as the sudden spike in volatility in 2018 led to losses exceeding 90% in short volatility products in a single day. Notably, this liquidation event occurred at a critical moment when several issuers were applying to the SEC to launch 3x leveraged single-stock ETFs, including companies like GraniteShares, Defiance ETFs, ProShares, and Direxion.

3x Leveraged Products Vanish Overnight

GraniteShares' 3x short AMD ETF was completely wiped out on Monday, becoming the latest case of risk in leveraged trading products. The product was designed to provide three times the inverse return of AMD's stock price, but the 38% surge in AMD's stock price that day erased all value of the ETF.

GraniteShares announced on its website: "Due to the net asset value (NAV) now being zero, there will be no redemption payments. Trading of the affected ETP has been suspended, and the securities will be delisted in due course according to exchange procedures." The company's CEO Will Rhind declined to comment on the matter.

Bloomberg ETF expert Eric Balchunas stated:

"We have witnessed the first termination event. Europe's GraniteShares -3x AMD ETP is no more. Forced termination, a XIV-style ending."

In February 2018, the market experienced an event known as "volatility apocalypse," where a sudden spike in volatility triggered massive losses for short volatility exchange-traded products, with products like VelocityShares Daily Inverse VIX Short-Term ETN (XIV) losing over 90% of their value in a single dayAt that time, the S&P 500 index fell by about 4%, with billions of dollars in investment capital evaporating as leveraged products aimed at profiting from low volatility collapsed under the pressure of unexpected volatility spikes. The event was driven by a combination of market concentration and the mechanisms of hedging and leveraged rebalancing.

The First of Many Leveraged ETF Liquidation Events in the Future?

Bloomberg industry research analyst Athanasios Psarofagis pointed out that this event demonstrates the real risk of liquidation for 3x stock ETFs, but he doubts that even such events will deter investors.

Todd Sohn, senior ETF analyst at Strategas Securities, stated that in the current fast-paced environment, single-stock liquidations are "almost inevitable."

The key question is when a similar situation will occur in the larger U.S. market. A month ago, Bank of America warned that ETPs that could trigger "volatility panic" were rising again.

Analysts noted that while the scale of the GraniteShares ETF liquidation event is much smaller than the 2018 XIV collapse, given the current level of leveraged retail participation in the market, analysts expect this to be the first of many leveraged ETF liquidation events in the future.

Surge in Applications for 3x Leveraged ETFs in the U.S. Draws Attention

The timing of the product liquidation is quite ironic, as just days ago, several issuers, including GraniteShares, had submitted applications for 3x leveraged products to the SEC.

These applications cover highly volatile stocks such as Tesla and Opendoor Technologies, as well as cryptocurrencies like Bitcoin, Ethereum, and Solana.

While such products already exist in Europe, they are hardly traded in the U.S. due to the volatility rules set by the SEC that limit fund leverage levels.

Defiance ETFs' first application includes a 3x long and short ETF for AMD, and ProShares and Leverage Shares' applications also include potential 3x AMD ETFs.

These applications were submitted after 2x leveraged funds became very popular among U.S. investors. It remains unclear how the proposed U.S. products will circumvent the SEC's volatility directives, but they represent an escalation of risk for issuers forced to push boundaries in a competitive market