Traders plowed billions of dollars into betting on a big rebound in tech stocks last month. Now their leveraged-up ETF positions are getting thrashed in the sweeping market meltdown.
Even as the Nasdaq 100 Index tumbled in July, cash continued flowing into funds with notable exposures to companies like Nvidia Corp. and Intel Corp., indicating investors were wagering the slump would prove short-lived.
But some of the ETFs — which use leverage to boost returns — are now being hit by double-digit drops as global investors pile into havens. That’s increasing the risk that the ETFs will tumble even more deeply if investors start rushing to the exits.
The Direxion Daily Semiconductors Bull 3x Shares (ticker SOXL), which delivers triple the daily move of the NYSE Semiconductor Index, took in a record $2.8 billion inflow in July, only to slide about 60% slide since July 10.
The ProShares UltraPro QQQ (ticker TQQQ), which outperforms when tech stocks rally, took in $830 million last month, the most since 2022, and has seen inflows of more than $400 million so far in August, data compiled by Bloomberg show.
Meanwhile, the GraniteShares 2x Long NVDA Daily ETF (ticker NVDL), which bets on Nvidia outperforming, took in $560 million last month after a record $1.6 billion inflow in June. It has tumbled 50% in less than a month.
The data underscores how much investors have been blindsided by the swift shift in sentiment, with Friday’s employment report helping to replace once-widespread faith in an economic soft landing with rekindled worries about a recession.
“The biggest concern today will be ‘forced selling,’” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the tech investors, especially the ones who own the leveraged ETFs, get margin calls today, they will have to sell at any price. It won’t matter if the shares become cheap.”
The data on Friday that showed unexpectedly slow payroll growth underscored the risk of an economic downturn just as earnings disappointments from some high-flying tech behemoths spurred fears that the stocks had run up too far. All the worries are now snowballing after the Federal Reserve opted not to cut rates at its July meeting, with some pundits calling for it to intervene before its next scheduled meeting.
The worries have been compounded by quarterly reports from companies, including Intel, whose shares suffered a historic decline last week after the firm gave a grim growth forecast and laid out plans to slash jobs. Amazon.com Inc., meantime, told investors that profits will, for now, take a back seat to heavy spending on AI, and its shares, too, dropped, losing 8% in the week ending Friday. The Nasdaq 100 tumbled as much as 5.5% on Monday.
“Many people are long growth/tech stocks, which is the brunt of the selloff,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “People who invest in leverage should understand the risks.”
Mighty Tech, whose biggest names staged a sizzling rally through June, has plunged into a correction. That hasn’t stopped investors from adding money to a fund that tracks Tesla Inc., Apple, Meta Platforms Inc., Nvidia, Alphabet Inc., Amazon.com and Microsoft Corp. The Roundhill Magnificent Seven ETF (MAGS) in July saw more than $170 million come in, its best month since its April 2023 inception.
Investors also poured cash into leveraged single-stock funds tracking companies like Tesla. For the $1.4 billion Direxion Daily TSLA Bull 2X Shares (TSLL), July marked its seventh straight month of inflows, with its 2024 haul adding up to nearly $700 million. It has tumbled more than 45% since July 10.
“Leverage is not for the faint of heart,” said Todd Sohn, an ETF strategist at Strategas. “Especially during volatile environments, you have to be precise with your risk and positioning.”