Semiconductor Selloff: Leveraged ETF Risks for India 2026

Tech stocks drag global equities as semiconductors slide

Technology stocks pulled down global equity markets on Tuesday as a sell-off in the semiconductor sector spread across risk assets. The move follows a sweeping selloff in AI-linked semiconductor stocks that began on Friday and then rippled through broader global markets. The episode has put renewed attention on how quickly investor positioning can amplify moves in a sector that has become central to the AI trade.

A key element in the current volatility is the growing role of leveraged exchange-traded funds (ETFs). Regulators in South Korea, a major semiconductor market, have raised alarms about the rising appeal of leveraged ETFs. The concern has landed at a moment when equities are already sensitive to shifts in AI expectations, and it coincided with a 10% overnight decline in South Korea’s Kospi index.

Why leveraged ETFs are in focus

Leveraged ETFs use derivatives to provide investors with amplified exposure, often delivering double or triple the exposure to a given stock or sector. In recent months, investors have used these products to increase exposure to the AI theme, particularly among semiconductor names.

That positioning matters during a selloff. When risk appetite weakens, leveraged products can become a focal point for selling as investors reduce exposure quickly. The current episode has been described as one where, until selling in leveraged products stabilises, semiconductor stocks globally could face a turbulent period.

The trigger: Broadcom update and a macro shock

The global move followed a weak tone after Broadcom’s quarterly update earlier in the week. Investors read the update as falling short of high expectations around demand for custom AI chips. The disappointment extended into Friday’s session as traders reassessed how quickly AI infrastructure spending turns into earnings and cash flows.

Macro data added pressure. A stronger-than-expected May US jobs report contributed to higher risk aversion across growth sectors. With semiconductors already priced for high expectations, the mix of earnings sensitivity and macro uncertainty created conditions for a sharp, correlated selloff.

South Korea’s warning and the Kospi’s 10% drop

South Korea’s role in the semiconductor supply chain makes it a key barometer for the broader complex. Regulators there have highlighted the growing popularity of leveraged ETFs, and the market reaction was severe, with the Kospi falling 10% overnight.

The spillover matters beyond Korea because semiconductors sit at the centre of global AI-capex expectations. The episode also reinforced how quickly sentiment can turn when positioning is crowded and instruments with embedded leverage are widely held.

What it means for India: a re-rating cycle, not one session

For India, the issue is not just a single down day in US semiconductors but the longer re-rating cycle tied to global AI hardware exposure. The common thread in comparisons across markets is listed exposure to the AI semiconductor supply chain. According to Kotak Securities’ Sanjeev Prasad, India’s AI and semiconductor exposure was described as “negative,” with the trend potentially persisting for another one to three years, which could limit foreign portfolio investor (FPI) interest.

Near term, investors are likely to track whether AI-linked global volatility persists, whether foreign outflows stabilise, and how quickly India can build investable exposure to hardware manufacturing. At the same time, Indian IT services firms are adjusting to AI-driven changes in client demand, even as the hardware layer remains a constraint.

Memory is the bottleneck: HBM and DRAM constraints through 2028

Alongside market volatility, a longer supply-side issue is shaping expectations. A persistent shortage of High Bandwidth Memory (HBM) and DRAM chips has been described as a critical bottleneck for India’s AI ambitions, with constraints expected to last until 2028.

This dynamic has been framed as a liquidity and margin event for India. The argument is that hardware scarcity can force a “compute-rationing” approach, potentially capping revenue growth for IT services firms attempting to pivot toward high-compute AI consulting. The risk highlighted is margin compression as compute costs rise through 2028 if firms cannot secure long-term HBM and DRAM supply.

Competing views: margin risk versus capex opportunity

Market commentary around the shortage includes both negative and positive interpretations. One view is that the shortage is a structural threat to India’s AI-led growth narrative, particularly without domestic HBM production, potentially leading to underperformance in IT-linked indices as compute costs pressure profitability.

A counter-view is that scarcity may push a wave of capital expenditure into India’s semiconductor ecosystem. In this framing, current price volatility is tied to supply constraints rather than demand destruction. On this view, investors should track upcoming Q3 and Q4 earnings calls for explicit mentions of “hardware supply chain risks” or “compute-related cost heads,” and also monitor progress under the India Semiconductor Mission (ISM) related to memory fabrication partnerships.

How shortages have already hit Indian tech stocks

The memory chip shortage has been linked to the period of pandemic-era disruptions beginning in early 2020, and was described as persisting into 2026 due to unprecedented AI-driven demand. The imbalance has raised microchip prices, pressured net profits for tech companies, and pushed firms to pass on costs to end users.

Indian IT stocks have also seen volatility tied to shortages and foreign flows. The data cited includes a 24% drop in the IT sector from mid-February to early April, alongside FII withdrawals driven by slow growth concerns and worries that AI may disrupt traditional IT services models.

China+1 accelerates as Washington tightens AI chip exports

Geopolitics is adding another layer. As Washington moves to restrict AI semiconductor exports to China, global firms are accelerating a “China+1” shift. The stated implication for India is potential benefit to domestic OSAT (Outsourced Semiconductor Assembly and Test) and EMS (Electronics Manufacturing Services) players as companies look to reduce China-linked supply chain risk.

Risks remain part of the discussion. One highlighted risk is potential Chinese retaliation, including restrictions on rare earths or other critical inputs for chip manufacturing, which could temporarily raise input costs for Indian EMS players and worsen global bottlenecks.

Consumers feel it too: PC prices seen rising up to 35%

The chip crunch is also showing up in end markets. With strong demand and limited supply, prices of laptops and desktops in India were described as expected to rise by up to 35% this year. Separately, China has warned that global chip supply could be disturbed again amid rising tensions with the Netherlands over Nexperia, after a Dutch government request for a Chinese-owned Nexperia factory to be sold.

Analysts have also flagged rising logistics costs and higher rare-earth materials costs linked to geopolitical conflicts as potential drivers of price increases for PCs and mobile devices.

Key facts and figures investors are tracking

Budget 2026 and India’s “first chip” year

India’s semiconductor narrative is also tied to domestic policy milestones. The text references 2026 as the year of India’s first chip, with attention on wafers rolling out of Dholera and Sanand and the next policy steps expected around Union Budget 2026.

Expectations cited include a Component Linked Incentive (CLI) scheme for chip-making consumables such as photoresists, industrial gases, and etching chemicals; expansion of the Design Linked Incentive (DLI) scheme; and potential National Critical Infrastructure status for semiconductor parks, including priority power supply and subsidised water tariffs. A key operational risk flagged is the lack of qualified engineers. The same discussion also warns that Budget Day volatility could be high, and notes that semiconductor-linked stocks may jump by 10% on a single announcement.

Market impact: volatility first, then the supply chain test

The immediate market impact is higher volatility, with leveraged ETFs cited as a mechanism that can sustain sharp moves in the short term. The next leg depends on whether selling in leveraged products stabilises and whether global semiconductor guidance shifts investor expectations around AI monetisation and cash-flow timing.

For India, the market impact also runs through capital allocation. Global capital has been described as continuing to prefer markets with direct AI and semiconductor supply chain exposure, a gap that shows up in market-cap rankings and FII allocations. In that context, domestic progress on hardware manufacturing and ecosystem depth becomes part of the equity narrative, not just an industrial policy goal.

Analysis: what signals matter from here

Several signals in the text are positioned as watch points. On the global side, investors are waiting for further guidance from semiconductor companies and monitoring upcoming central bank decisions referenced by investors. On the India-specific side, attention is on whether foreign outflows stabilise and whether listed participation in the AI hardware cycle expands.

Separately, the structural memory constraint remains central. Commentary includes expectations that shortages could run through 2026 and possibly into 2027, while another timeline cited suggests wafer supply tightness could persist until 2030 because HBM production consumes more wafers than standard memory production. Taken together, the common message is that supply-side limits can shape margins and growth expectations even when AI demand remains strong.

Conclusion

The selloff in AI-linked semiconductors has exposed how leveraged ETF positioning can amplify market moves, while the longer memory and wafer constraints underline that the AI hardware cycle is still supply-limited. For India, the near-term focus is on whether global volatility fades and foreign flows stabilise, while the medium-term focus is Budget 2026 signals and tangible progress that expands India’s listed exposure to the semiconductor supply chain.