Usman Salis
U.S. equity markets are flashing an unusual signal. Exchange-traded funds have claimed more than 35% of total exchange volume in each of the last nine trading sessions - the second-longest streak of this kind since 2018. On Thursday alone, ETFs accounted for over 40% of total market activity. For context, the only longer streak on record occurred during the 2020 market crash, when ETF dominance stretched across ten consecutive sessions and the VIX exploded above 70.
What Makes This Streak Different from 2020
The unusual part this time is the absence of panic. In 2020, the ETF surge coincided with extreme market stress and sky-high volatility. Today, the VIX remains relatively subdued - yet ETF activity is matching crisis-era patterns. That disconnect is exactly what is making analysts pay attention.
When leverage rises alongside elevated ETF trading volumes, markets can become sensitive to shifts in sentiment.
Adding pressure to the picture, hedge fund gross leverage has reportedly climbed to around 307%, near record levels. Much of that exposure is believed to come from short positions built through ETFs. Volatility Index (VIX) Goes Down to 28% after 2 Weeks of Consecutive Growth explored how even modest VIX shifts can rapidly reprice market risk - and with positioning this stretched, the margin for error is thin.
Why Volatility Signals Could Trigger a Fast Unwind
Volatility dispersion is also flashing warnings. As covered in SPX Volatility Spread Hits Highest Since 2008, Barchart Says, the gap between implied volatility in individual stocks and the broader index recently reached its widest point since the financial crisis. That kind of divergence, layered on top of heavy ETF activity and crowded short books, creates conditions where a sentiment shift could trigger rapid and disorderly unwinding.
The broader pattern is examined in Positive Correlation Between VIX and S&P 500 Predicts a Stop of Bullish Rally, which looked at how volatility readings that move in step with equities have historically marked turning points in market momentum. With ETF trading elevated, leverage stretched, and volatility compressed, the conditions for a sharp squeeze or a sudden VIX spike are building quietly in the background.
Usman Salis
