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ETFs that give retail investors greater exposure to individual stocks are booming. This could be an ominous sign for the market and for the funds themselves where the glitch appears.
Leveraged single-stock ETFs hit a record $17 billion in trading volume on Nov. 21, according to Todd Thorne, ETF strategist at Strategas. Several issuers have launched these funds in recent years, typically tracking volatile stocks such as: Nvidia, tesla and micro strategy.
“The leveraged cohort as a whole represents just 0.4% of U.S. ETF assets under management, but volume as a percentage of the total has recently been consistently in the 8-9% range, up from 4% at the beginning of the year. “We can see the growth rate. It's interesting to see the stock trading at an all-time high,” Song said in a note to clients last week.
Song said it seems more likely that volume will spike during market downturns, when there is general volatility that is far from a bull market. Their recent popularity may be a warning sign of euphoria among some investors.
“This, combined with the surge in inflows into equity ETFs, creates a case for hot sentiment developing.Remember, the third year of a bull market is the first after major markets break out of their lows. “It's often a trickier backdrop than in previous years,” Song said. .
Similarly, Morningstar senior analyst Daniel Sotilov told CNBC that the rise of these types of leveraged funds is indicative of a “gambling mentality” in the market, and investors should avoid them altogether. he said.
MicroStrategy Fund
For now, the overall bull market on Wall Street is still intact, but some individual stock ETFs are showing new signs of stress.
One of the big concerns about leveraged funds in general is that they are only designed to meet a stated return on a daily basis. Investors can expect long funds, especially leveraged funds, to underperform their label targets over the long term due to a property often referred to as “volatility drift.”
But another problem has come to the fore, especially with the soaring popularity of MicroStrategy's leveraged funds. Funds struggle to track volatile crypto stocks even on a daily basis.
In the five trading days leading up to Thanksgiving, two major leveraged long MicroStrategy funds had multiple trading sessions with returns that differed from their stated targets by more than 2 percentage points, according to FactSet returns data. .
MicroStrategy (MSTR) vs 2x leveraged fund
| safety | Returned on 11/21 | 11/22 Return | Returned on 11/25 | 11/26 Return to Japan | 11/27 Return to Japan |
|---|---|---|---|---|---|
| MSTR | -16.16% | 6.19% | -4.37% | -12.33% | 9.94% |
| MSTU | -28.13% | 13.38% | -10.74% | -24.32% | 13.93% |
| MSTX | -31.02% | 8.79% | -12.50% | -26.17% | 20.59% |
sauce: fact set
Single stock funds typically purchase swap contracts from banks to lock in leveraged exposure. however, The T-Rex 2X Long MSTR Daily Target ETF (MSTU) and the Defiance Daily Target 2X Long MSTR ETF (MSTX) have both relied on options to create leverage in recent days. This is because there was not enough supply in the swap market. The fund acknowledged to CNBC that it could make it more difficult to reach the fund's goals.
The two funds have combined assets of more than $4 billion, according to their website. The high demand for capital and the high volatility of MicroStrategy itself appear to be causing financial institutions to fear using swaps to encourage leveraged bets on stocks.
“Every strategy has a limit at some point. Sometimes, as we're seeing now, it's a structural problem that the market can't deal with anymore. Sometimes it's based on the specifics of the strategy.” Sotilov said.
Despite recent problems, the single-stock ETF boom is still growing. On Tuesday, Defiance launched the Daily Target 2X Long NVO ETF (NVOX), offering leveraged exposure to stocks of obesity drug manufacturers. novo nordisk.
