(Bloomberg) -- Buying the dip has been a winning strategy during the recent epic AI-fueled rally in technology shares. It’s backfired this week — and is especially excruciating for those who used amped-up wagers to amplify returns.
A batch of tech-centered leveraged exchanged-traded funds — designed to generate double or triple the daily move of underlying securities — scored double-digit losses after a market rout hammered stocks tied to the frenzy in artificial intelligence. The Nasdaq 100 tumbled 3.7% Wednesday and notched its worst day since October 2022.
The Direxion Daily Semiconductors Bull 3x Shares (ticker SOXL), which delivers triple the daily move of the NYSE Semiconductor Index, tumbled 15% Wednesday to extend a 37% loss in the past 14 days. The fund took in a record inflow of $2.4 billion in the past six trading sessions. The $21 billion ProShares UltraPro QQQ (TQQQ) and the $4 billion ProShares UltraPro S&P 500 (UPRO) fell nearly 7% and 11% on Wednesday, respectively, after taking in a cumulative inflow of about $650 million last week.
Wednesday’s tech slump followed disappointing earnings from Alphabet Inc. and Tesla Inc., which raised questions about when AI investments would pay off, accelerating a rotation out of tech winners and into smaller-capitalization stocks. The Nasdaq 100 Index has dropped nearly 8% from its July 10 record, wiping more than $2 trillion off the market value.
“Most investors are using these leveraged products as a way to double-down on their investment thesis,” said Jane Edmondson, head of thematic strategy at TMX VettaFi. “That approach amplifies gains when the underlying goes up, but also greater pain when they go down.”
The seemingly ill-timed trades underscore the heightened risk when it comes to investing in this high-octane breed of ETF, which uses derivatives to boost returns. Inverse and leveraged ETFs are popular among day traders as they’re designed to be held for short periods. But their structure means they can deliver massive losses as well as outsize gains.
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. Year-do-date, all four funds are still boasting a big rip, with gains of more than 30% each and more than 280% for GraniteShares 2x Long NVDA Daily ETF (NVDL), which has become one of the most heavily traded ETFs at over $1 billion a day.
“Obviously when their underlyings are down significantly, these ETFs will follow,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “But they have performed exceptionally well this year and year to date still well up.”
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