Wall Street closes at a record for the first time since end of January
By Patturaja Murugaboopathy and Gaurav Dogra
(Reuters) -Leveraged equity exchange-traded funds have seen a surge in inflows this month as some investors seek to position for amplified gains when markets recover from a selloff induced by U.S. President Donald Trump’s trade tariffs.
According to LSEG Lipper data, leveraged equity funds have received inflows of $10.95 billion so far this month, already surpassing a 5-year high of $9.2 billion recorded last month. The previous peak was in March 2020, when markets were pummelled by the COVID crisis.
Leveraged equity funds are designed to deliver multiples of the daily returns of an underlying index such as S&P 500 or Nasdaq 100. They are especially popular among retail investors who want to avoid futures markets, where volatility can trigger margin calls or forced selling if prices fall.
Since Trump announced reciprocal tariffs on April 2, the MSCI World Index is down more than 3%, while the S&P 500 and the Nasdaq indexes are down 5% each.
Losses were steeper initially but there has been a recovery in markets after his decision to pause those tariffs by 90 days.
Rob Kane, director of alternative investments at Commonwealth Financial Network, said inflows into leveraged ETFs were largely driven by expectations of imminent Federal Reserve rate cuts and the view that tariffs were being used as leverage in broader trade negotiations.
"Initial over-reactions driven by investor sentiment have often reversed quickly, and the short-term performance nature of leveraged ETFs, combined with the substantial gains they can generate, makes them a tactical tool for capitalizing on heightened price dislocations," he said.
These funds have gained popularity, thanks to the rise of trading platforms such as Robinhood (NASDAQ:HOOD), which offer ease of access to these types of ETFs for retail investors.
However, some analysts warned that these funds suffer from performance decay, where returns erode over time due to daily rebalancing and market volatility, making them risky for long-term holding.
Vince Stanzoine, chief executive officer at First Information, said leveraged ETFs were not suitable for longer term holdings and the daily resets played havoc with returns, especially when markets were not trending.
"In fact professional traders including myself will short X3 leveraged ETF such as TQQQ to benefit from this decay and inefficiencies."