Understanding the Market | Why are US retail investors flocking to high-leverage ETFs?
Analysts expect retail investors to lean towards contrarian bets, buying on dips or selling on highs. They also noted that retail investors are diversifying their investments, shifting from stocks with the largest gains such as the "Big Seven" in the US stock market to other stocks. Data shows that retail investors aim to enter the market early as stock market gains widen
According to the information from the Zhitong Finance and Economics APP, as the U.S. stock market soared to record levels in the first three months of this year, retail investors are increasingly inclined to take higher risks to capitalize on this momentum. Data from Vanda Research, a research firm tracking retail trading volume in the U.S., shows that in recent weeks, the proportion of retail investors using leverage has been steadily increasing.
The data indicates that as the U.S. stock market reached historic highs, retail investors reduced their exposure to major ETFs such as the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Trust (QQQ), and instead increased their exposure to triple-leveraged funds.
This trend emerged as major stock indices surged in the first quarter. Data shows that in the first quarter of this year, the Dow Jones Industrial Average rose by 5.62%, the S&P 500 Index rose by 10.16%, and the Nasdaq Composite Index rose by 9.11%. Additionally, investors' preference for risky assets such as cryptocurrencies and meme stocks has also risen again.
A strategist at Vanda Research stated, "If we expand the leveraged ETF pool to some larger funds, we will see retail inflows (adjusted for leverage) now easily surpassing the peak of the last U.S. stock market rally driven by the AI frenzy from May to July 2023." The strategist pointed out that retail investors may be trying to make their capital more effectively utilized through leverage.
Meanwhile, another potential driving factor is that after about two years, retail investors' portfolios have finally recovered from losses during the bear market in 2022. Vanda Research stated that retail investors are now focused on driving profits rather than recovering losses, and they may have more confidence to take on higher risks.
The strategist at Vanda Research also noted that retail investors are expected to lean towards contrarian bets, buying on dips or selling on highs. They also mentioned that retail investors are diversifying their investments, shifting from stocks like the "Big Seven" in the U.S. to other stocks. They added that data shows retail investors are looking to enter the market early as stock market gains widen