Leveraged ETFs snap back as casino crowd mints US$50 billion

[NEW YORK] Three weeks ago, Wall Street’s casino crowd took a beating. AI stocks buckled, semiconductor shares tumbled and leveraged trades unravelled.

Now many of those speculative trades are snapping back just as quickly.

Fresh money is flowing into leveraged exchange-traded funds, the same products that only weeks ago sat at the center of concerns that retail speculation had gone too far. Call buying has surged and many of tech trades punished only recently are once again among the market’s biggest winners.

Strong corporate earnings and a resilient economy have helped the bull market absorb the shock while falling volatility has encouraged investors to reach for upside once more.

The rebound also exposes a sharper truth: It has been much easier to lever the bull market than to lever its hottest winners.

Bloomberg Intelligence data showed leveraged index funds created nearly US$50 billion in wealth so far this year, while single-stock leveraged funds destroyed US$4 billion. The calculation takes into account gains and losses generated by fund performance after stripping out investor inflows and outflows.

Betting hard on a market that keeps recovering has paid. Trying to amplify the gains of individual winners has been far less forgiving once momentum breaks and volatility returns.

“There is just more risk and volatility in the single-stock names and people are more likely to get burned. But it’s also this area is so new and so many products are launching virtually every day,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “People just keep buying no matter what.”

That persistence has been one of the defining features of retail trading this year. Through AI scares, geopolitical shocks and repeated bouts of volatility, individual investors kept putting money to work, often using broad-market ETFs to buy weakness rather than trying to call the precise bottom.

SEE ALSO

Institutional investors reveal cautious approach to tech favorites in US quarterly 13F filings

“Retail investors have historically had a reputation for giving in to emotions when volatility picks up, but lately we’ve seen the opposite,” said Adam Phillips, head of investments at EP Wealth Advisors. “They’ve been disciplined buyers during market weakness and, in some ways, have become the smart money.”

South Korea offered a vivid reminder of how quickly leverage can turn against investors. The Kospi’s sharp retreat from record highs in late June forced liquidations and was amplified by rebalancing in the country’s newly launched leveraged ETFs, according to the Financial Services Commission.

Regulators responded with cooling measures, including higher minimum cash deposits and a temporary halt to new listings.

US investors have responded very differently. Roughly 900 leveraged ETFs took in about US$3.7 billion in the past month, according to data by Bloomberg Intelligence, even as some of the most popular products remained badly bruised.

The funds, increasingly part of the retail trading toolkit, typically use derivatives to magnify the daily move in an index or individual security, often targeting two or three times the gain – or loss – in either direction.

The US$25 billion Direxion Daily Semiconductor Bull 3X ETF drew the largest share of the money despite losing about 20 per cent over the period, while the ProShares UltraPro QQQ fund ranked second. The Direxion Daily TSLA Bull 2X ETF came third in terms of flows despite a loss of more than 50 per cent so far this year.

The speculative wager is now clear: day traders are rushing back into some of the trades that burned them only weeks ago, betting that another burst of momentum can make up for losses that remain substantial. 

One fund offering two-times leveraged exposure to Sandisk jumped more than 70 per cent this week but was still down about 30 per cent over the past month. The Direxion Daily SK Hynix Bull 2X ETF surged more than 40 per cent this week but is still down 23 per cent over the past month. 

The rush back into risk has had a fundamental tailwind. Second-quarter earnings have continued to beat expectations, helping the S&P 500 to fresh records. The benchmark rose 0.4 per cent this week, while the Nasdaq 100 gained 1.1 per cent.

“Fundamentals are strong and an overweight to equities in a diversified portfolio is certainly justified,” said Michael Contopoulos, head of multi-asset macro investing at Janus Henderson Investors. “We think chasing crowded and expensive areas of the market is a big risk and we would avoid it.”

The technical backdrop is turning friendlier, too. Citadel Securities sees the global leverage reset as “increasingly mature”, with much of the systematic deleveraging already having run its course and the next impulse potentially coming from fresh buying.

Softer inflation helped push yields lower. Even elevated oil prices and renewed tensions with Iran failed to derail the advance. With earnings season winding down, attention now turns back to monetary policy, including minutes from the Fed’s July meeting and the Jackson Hole symposium.

Julie Biel, a portfolio manager at Kayne Anderson Rudnick, said the broader bull case remains intact. But she questions how long the growth behind some of the hottest AI trades can persist.

“Where investors might be overconfident is the durability of that growth,” she said. “But I think that will be the ongoing debate that we can’t really solve until we understand the financials of both Anthropic and OpenAI because they are driving the majority of workloads.” BLOOMBERG