DEALERS plowed billions dollars betting on a big rebound in tech stocks last month. Now their leveraged ETF positions are being destroyed in the sweeping market meltdown.
Even as the Nasdaq 100 Index fell in July, money continued to flow into funds with significant exposure to companies such as Nvidia Corp. and Intel Corp., indicating that investors were betting that the decline would be short-lived.
But some of the ETFs – which use leverage to boost returns – are now being hit by double-digit declines as global investors flock to the havens. That's raising the risk that ETFs could fall even deeper if investors start rushing for the exits.
Direxion Daily Semiconductors Bull 3x Shares (ticker SOXL), which gives three times the daily movement of the NYSE Semiconductor Index, took a record inflow of $2.8 billion in July, only to slide about 60% since July 10.
ProShares UltraPro QQQ (ticker TQQQ), which performs best when tech stocks rise, took in $830 million last month, the most since 2022, and has seen inflows of more than $400 million so far in August, data compiled by Bloomberg show.
Meanwhile, the GraniteShares 2x Long NVDA Daily ETF (ticker NVDL), which bets on Nvidia's outperformance, took in $560 million last month after a record inflow of $1.6 billion in June. It has fallen 50% in less than a month.
The data underscore how much investors have been blindsided by the rapid shift in sentiment, with Friday's jobs report helping to replace once-widespread belief in a soft economic slowdown with rekindled worries about a recession.
“The biggest concern today will be 'forced selling,'” said Matt Maley, chief market strategist at Miller Tabak + Co. sold at any price. It won't matter if the stock goes cheap.”
Friday's data showed unexpectedly slow wage growth underlined the danger of an economic downturn just as earnings disappointments from some high-tech giants fueled fears that stocks had risen too high. All worries are now being snowballed after the Federal Reserve chose not to cut rates at its July meeting, with some experts calling for it to intervene ahead of its next scheduled meeting.
Concerns have been compounded by quarterly reports from companies, including Intel, whose shares suffered a historic decline last week after the firm gave a gloomy growth forecast and laid out plans to cut jobs. Amazon.com Inc., meanwhile, said investors that profits, for now, will take a back seat to big spending on AI, and its shares also fell, losing 8% in the week ending Friday. The Nasdaq 100 fell 5.5% on Monday.
“A lot of people are long growth/tech stocks, which is the main selling point,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “People who invest in leverage need to understand the risks.”
Mighty Tech, whose biggest names staged a strong rally through June, has plunged into a correction. That hasn't stopped investors from pouring money into a fund that tracks Tesla Inc., Apple, Meta Platforms Inc., Nvidia, Alphabet Inc., Amazon.com and Microsoft Corp. The Roundhill Magnificent Seven ETF (MAGS) saw more than $170 million inflows in July, its best month since early April 2023.
Investors also poured money into single-stock fund tracking companies like Tesla. For the $1.4 billion Direxion Daily TSLA Bull 2X ( TSLL ) stock, July marked the seventh month of inflows, with its 2024 load adding up to nearly $700 million. It has fallen more than 45% since July 10.
“Leverage is not for the faint of heart,” said Todd Sohn, an ETF strategist at Strategas. “Especially during volatile environments, you have to be precise with your risk and positioning.”