Tax season in the United States, individual investors are tight on funds! They collectively flock to high-leverage ETFs
US retail investors are buying fewer stocks during tax season, but their interest in high-leverage exchange-traded funds is increasing. Retail funds are flowing into four of the most popular ETFs, including the S&P 500 Index ETF, the Nasdaq 100 ETF, the 3x Long Nasdaq ETF, and the 3x Long Semiconductor ETF. The use of leverage by individual investors has significantly increased, but this also makes them more vulnerable to stock pullbacks. Retail trading activity may start to pick up in early May
According to the Zhitong Finance and Economics APP, on the eve of the tax deadline in the United States every April 15th, the number of individual investors buying stocks seems to decrease due to seasonal reasons, but at the same time, their interest in leveraged exchange-traded funds (ETFs) is increasing.
In a report on Wednesday, Marco Iachini and Lucas Mantle of Vanda Research pointed out that retail funds are often affected by the mid-April U.S. income tax deadline, and this year is no exception. They found that cash stock purchases were slightly below the average level during the post-COVID period, around the 44th percentile. They stated that trading activity may start to increase in early May, just in time for Nvidia's (NVDA.US) fiscal 2024 first-quarter earnings conference call.
However, they noted that in recent weeks, the use of leverage by individual investors has "significantly increased." Since the beginning of the year, retail funds have flowed into four most purchased ETFs, which are the S&P 500 Index ETF (SPY.US), the Nasdaq 100 ETF (QQQ.US), the 3x Long Nasdaq ETF (TQQQ.US), and the 3x Long Semiconductor ETF (SOXL.US).
Among them, TQQQ aims to provide three times the daily return of the Nasdaq 100 (before fees and expenses), while SOXL aims to provide three times the daily return of the NYSE Semiconductor Index.
Iachini and Mantle stated, "Investors are trying to use leveraged ETFs to make their capital generate greater returns, and we have no objection to this logic, but it does make retail investors more susceptible to stock pullbacks."