Wall Street's latest Poison: Leveraged ETFs
The market always seems to teach retail investors a lesson. Bloomberg reported leveraged ETFs such as The Direxion Daily Semiconductors Bull 3x Shares (ticker SOXL), which delivers triple the daily move of the NYSE Semiconductor Index, took in a record 1.5 billion last week, only to drop “15% Wednesday to extend a 37% loss in the past 14 days.”
“The $23 billion ProShares UltraPro QQQ (TQQQ) and the $4 billion ProShares UltraPro S&P 500 (UPRO) fell nearly 7% and 11%, respectively, after taking in a cumulative inflow of about $650 million last week,” Denitsa Tsekova and Isabelle Lee reported.
“There is a natural tendency for people to want to be part of a group or crowd,” writes Martha Stokes, Chartered Market Technician. But, “Retail investors will always lose money because they lack the ‘education’ whereas financial professionals are well informed – that’s what they do.” professor Bige Kahraman says.
“Most investors are using these leveraged products as a way to double-down on their investment thesis,” Juctsane Edmondson, head of thematic strategy at TMX VettaFi states the obvious. “That approach amplifies gains when the underlying goes up, but also greater pain when they go down.”
In a recent interview, commodity trader Carley Garner expressed amazement at the number of people who were holding leveraged Nvidia ETFs in their IRAs. Bloomberg provides confirmation of the retirement account speculating, “GraniteShares 2x Long NVDA Daily ETF (NVDL), has become one of the most heavily traded ETFs at over $1 billion a day.”
“Leveraged long and short single-stock funds have amassed around $9 billion of inflows so far in 2024, on track to surpass last year’s $10.2 billion.”
Talking up his product, Mohit Bajaj director of ETFs at WallachBeth Capital said “Obviously when their underlyings are down significantly, these ETFs will follow. But they have performed exceptionally well this year and year to date still well up.”
But Professor Kahraman warns “It is exactly what we caution against – gambling as a form of investment in the stock market. It’s very dangerous...Retail investors end up losing money.”
Price inflation has spurred people to gamble. In 2022, U.S. Casinos enjoyed record profits. "While business challenges remain, high consumer demand continues to fuel our industry's record success," Bill Miller, the American Gaming Association’s president and CEO told CBC News at the time. "Our sustained momentum in the face of broader economic volatility points to gaming's overall health today and provides confidence as we look to the future."
Just as Wall Street created products to participate in the housing boom (subprime mortgages, mortgage backed securities, credit derivatives), the industry now has triple leveraged ETFs to satisfy the public’s gambling appetite. What could go wrong?
