This month has seen a significant increase in inflows to leveraged stock exchange-traded funds (ETFs) as investors seek higher returns amid market volatility driven by trade policies. According to LSEG Lipper, leveraged stock funds have attracted $10.95 billion, surpassing last month's five-year high of $9.2 billion. The previous peak was in March 2020 during the COVID-19 crisis.
Leveraged stock funds aim to deliver multiple times the daily returns of underlying indices like the S&P 500 or Nasdaq 100. These funds are popular among individual investors who wish to avoid the futures market's risks of margin calls and forced selling.
Since trade measures were announced, the MSCI World Index has dropped over 3%, while the S&P 500 and Nasdaq indices have fallen by 5%. However, markets have rebounded following a suspension of these measures. Rob Kane from Commonwealth Financial Network noted that inflows are driven by expectations of Federal Reserve rate cuts and trade negotiations.
Despite their appeal, some analysts warn of performance decay in these funds due to daily asset rebalancing and market volatility, making them risky for long-term holdings. Vince Stanzione of First Information advises against long-term investment in leveraged ETFs, citing potential return erosion.
