Retail traders pile into leveraged ETFs, pushing assets to record $100 B

Retail traders are driving up the leveraged ETF boom, which has pushed asset weights to a new record of $100 billion. 

The market risks from AI and crypto have not stopped these traders from continuing to pile into leveraged funds to make trading gains in stocks such as Microsoft, Tesla, and semiconductor companies.

Retail traders drive surge in leveraged tech and crypto ETFs

As of last week, assets in long equity leveraged ETFs stood at about $95 billion. These funds, designed to magnify stock movements by two or three times, have outpaced their bearish counterparts, which collectively hold just $9 billion. 

Athanasios Psarofagis, an ETF analyst, said the market is extremely attractive for ‘degen traders’ as ETF investors see the nearly euphoric sentiment, a constant ‘buy the dip’ approach and a record number of leveraged products. These traders generally pursue high-risk and leveraged investments.

The leveraged ETFs that focus on technology have been particularly positive. The MSFU and SOXL from  Direxion Daily have both seen back-to-back weeks of inflows. The TSLL also saw its net asset growth over the past ten weeks, which hasn’t been seen since 2023. 

The link between cryptocurrency and ETFs has also witnessed a strong rebound in retail participation. The  2X Ether ETF (ETHU) saw its highest weekly inflows after a drop in the price of Ether. The fund’s retail trading was triggered by a social media promotion from Eric Trump, and the fund saw the highest cash inflows to date.

Analysts raise concerns over leveraged ETFs amid rising speculation

There are concerns about the sustainability of leveraged ETFs. These funds are usually meant for short-term traders because high-frequency trading products can result in substantial tracking errors over extended periods. Therefore, some individuals may be using these products the wrong way and lose a lot of money in the current volatile markets.

“The speculation is there,” noted Jim Chanos, founder of Chanos & Co., in an interview with Bloomberg Television. “Not quite where it was in 2021 — which was the most speculative market I have seen — but it is getting back there.”

The dominance of long-leveraged ETFs in the market is evidence that retail traders are still positive about the market. As long as tech firms’ earnings keep on growing and monetary policy remains lax, the speculative frenzy may not subside.

However, not all leveraged ETFs have been enrolled in the boom. NVDL, the Direxion  Daily NVDA Bull 1.5X Shares, lost clients last week after Direxion’s fund had attracted a record rise the week before. Indeed, Direxion’s fund on the opposite side of AI and big data (AIBD) has also fared poorly and has built assets of less than $2 million over the last nine months.