Leveraged ETFs Lured $1.5 Billion on Day Gensler Flagged Risks
(Bloomberg) -- The very day Gary Gensler signaled new rules to tame the risky world of leveraged ETFs, investors piled into the complex products at a historic rate.
More than $1.5 billion was poured into four of the most amped-up exchange-traded funds in the U.S. on Monday, according to data compiled by Bloomberg released overnight. The outsize allocation came just as the Securities and Exchange Commission Chair warned the derivatives-powered investing style is not suitable for everyone
For one fund, the $3.25 billion Direxion Daily S&P 500 Bull 3X Shares (ticker SPXL), the $302 million addition was its biggest ever. For the $15.6 billion ProShares UltraPro QQQ (TQQQ), the $755 million influx was the second-largest after a record set last week.
Investors appear to have been betting on a rebound amid a slump in U.S. stocks at the start of the week. Each of the four products uses derivatives to deliver three-times the performance of a target benchmark, and inflows are frequently short-term in nature as traders attempt to catch a bounce.
Monday’s infusion looks well-timed -- major equity gauges posted a solid gain on Tuesday. It came as Gensler published a statement announcing the regulator was looking into new rules.
“For more than a decade, SEC staff and a number of Commissioners have been warning the public that these products, often called ‘complex ETPs,’ can pose risks to individual investors,” he wrote. “These ETPs, however, pose risks even to sophisticated investors, and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions.”
Gensler’s announcement came a few days after the SEC greenlit new versions of two infamous volatility strategies. Volatility Shares LLC received listing approval for an inverse VIX ETF and a leveraged bullish VIX ETF that recall two exchange-traded notes from Credit Suisse Group AG that were at the center of market turmoil.
The new products come in different structures and follow alternative rebalancing methods, which the SEC said should mitigate concerns. Still, Gensler said that while such funds may meet regulatory requirements, “that doesn’t mean the products are right for every investor.”
Alongside SPXL and TQQQ, the $3.6 billion Direxion Daily Financial Bull 3X Shares (FAS) added $304 million on Monday. The $2.65 billion Direxion Daily Technology Bull 3X Shares (TECL) lured $149 million. Settlement schedules mean that flow data for all of the funds arrive with a one-day lag.
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