The semiconductor sell-off has punished investors across the board. Leverage has made the damage far harder to recover from.

The iShares Semiconductor ETF (SOXX) has fallen roughly 25% from its June 22 peak while the Direxion Daily Semiconductor Bull 3X Shares (SOXL) has plunged nearly two-thirds over the same stretch.

The latest slide is part of a chip-stock crash that the rest of the market has largely absorbed.

It would be easy to assume that SOXL should be down three times the SOXX loss of 25%, or 75%. SOXL did not malfunction. The fund is designed to deliver three times the daily return of the NYSE Semiconductor Index.

Daily is the key word.

The fund resets its exposure after every session. The next day's gain or loss then compounds from a new starting value, so its return over several weeks will not necessarily equal three times the semiconductor index's return over that period.

That structure can work spectacularly when chip stocks keep moving steadily higher. Volatile sell-offs or even just a choppy, sideways market expose the pitfalls of leverage that resets daily.

The loss also makes the climb back much steeper. SOXX needs a gain of roughly 33% to erase the 25% decline. SOXL would need to rally around 170% to recover from a 63% plunge.

Wall Street increasingly wraps leverage around some of the market's most volatile trades. It was already rolling out leveraged products tied to SpaceX only days after its IPO.

And investors still have plenty riding on these products.

The 200 largest leveraged ETFs represent more than $400 billion in notional value, reflecting the total market exposure after leverage is applied, according to Baird Strategas. That figure has dropped by roughly $100 billion over the past month but remains close to record territory.

The decline may look enormous in dollars. But measured against the leveraged ETF boom that preceded it, Baird Strategas' chief ETF strategist Todd Sohn described the retreat more bluntly.

"Barely a scratch here thus far."

Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com.

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