Leveraged Funds Surge as Retail Investors Embrace Risk Amid Market Jitters
Fueled by undeterred optimism, retail investors are fueling leveraged funds to unprecedented heights, reaching nearly $100 billion. Despite recent market volatility, speculative appetite remains strong, contrasting with subdued bets on market pessimism.
Bullish Bets Gain Traction
Exchange-traded funds (ETFs) designed to magnify asset gains are attracting significant inflows as speculators seek to capitalize on market dips. Bets on technology stalwarts such as Tesla and Microsoft have been particularly popular, leveraging the bullish momentum in the tech sector.
Semiconductor ETFs have also seen a surge in interest following the sector's recent decline. Additionally, an ETF tracking Ether, which experienced a steep sell-off on tariff concerns, has recorded record inflows.
Bullish Appetite Overwhelms Bearish Bets
By comparing asset volumes and trading activity between bullish and bearish equity products, the extent of fear of missing out (FOMO) becomes evident. Assets in long equity derivatives-based products reached a record high of $95 billion mid-last week. This contrasts sharply with inverse equity ETFs, which have amassed only $9 billion in total assets.
"Degen Traders" Flourish
According to Athanasios Psarofagis, BI ETF analyst, the prevailing "near-euphoric sentiment" and the availability of record-breaking leveraged products are creating an environment conducive to "degen traders." These investors prioritize high-risk, leveraged investments.
Resilience of Bullish Appetite
US stocks rebounded on Monday, driven by tech companies, dismissing the latest tariff concerns. "Degen" daytraders have been flourishing in the current market conditions, and the persistent demand for bullish products bodes well for Wall Street issuers planning to launch new products based on popular indexes and single stocks.
ETF Inflows and Notable Exceptions
Direxion's ETFs tracking Microsoft and chipmakers have witnessed consistent inflows for two weeks. Direxion's Tesla ETF has recorded nine consecutive weeks of gains, the longest since 2023. The 2x Ether ETF has received inflows for five weeks and saw record inflows last week following social media endorsements from Eric Trump.
However, Direxion's fund amplifying Nvidia returns experienced outflows last week, despite record inflows of $1.6 billion in the preceding week.
Criticisms and Cautions
Amid the leveraged ETF boom, concerns have been raised about investors not fully understanding the risks involved. These products are typically designed for short-term trading and can significantly deviate from the underlying asset's performance over longer horizons.
"The speculation is there," said Jim Chanos, president and founder of Chanos & Co., highlighting the resurgence of interest in speculative cryptocurrencies. "It is getting back there, though not quite where it was in 2021, which was the most speculative market I have seen."