3X Tech ETF Pulls In Billions Amid Head Winds

What’s compelling investors to buy such a sharp dip?

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Reviewed by: Dan Mika
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Edited by: Dan Mika

The tech benchmark Invesco QQQ Trust (QQQ) fell into correction territory last week, while the ARK Innovation ETF (ARKK) is down 28% so far this year.

Between the prospect of multiple interest rate hikes and slowing valuation growth, the technology sector has entered 2022 facing the harshest head winds in more than a decade.

That isn’t stopping dip-buyers from taking on even riskier bets on the sector.

The ProShares UltraPro QQQ (TQQQ), which is a triple-leveraged bull ETF following the tech index, has seen $3.5 billion in net flows year-to-date, according to FactSet data, while QQQ has had net outflows of $7.6 billion.

 

Data courtesy FactSet

 

That inflow trounces inflows to bearish funds like the ProShares UltraPro Short QQQ (SQQQ), with $245 million in net flows, or the ARKK-inverse Tuttle Capital Short Innovation ETF (SARK), which has gained $211 million so far this year.

So what’s behind some investors making a play that seems extremely risky on its face?

Longtime Bull Pares

David Kreinces, the chief investment officer of ETF Portfolio Management (ETFPM), told ETF.com that his firm has liquidated or hedged against its tech holdings in favor of emerging markets, energy and China-focused funds to generate growth.

ETFPM core offerings are based on using leveraged funds in a long strategy. Its “Income & Tech 3x” benchmark launched in 2017, offering a combination of TQQQ and the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) as the basis of the strategy.

However, those benchmarks include risk controls, which the rapid drawdown in technology stocks tripped for his clients.

It’s possible that the inflows for TQQQ are coming from other investors that have long-term horizons and believe tech will rebound, but Kreinces said that isn’t an option for him without the protection of leveraged bond funds to offset the risk of leveraged tech.

“The magnitude of the short-term volatility could make that plan difficult to stomach,” he said. “We’ll see how much lower the market bottom turns out to be, but for our clients, we are certainly not using leverage in the current environment, and we are not using technology exposure given the recent trends.”

“I don’t think investors want to be bottom-fishing technology here,” Kreinces added. “There will be big bounces that will be tempting, but it’s very likely that investors in technology will want to revisit six to 12 months from now.”

BTFD & Recency Bias

It’s tempting to assume new retail investors spurred by the rapid ascent of GameStop and AMC last year added TQQQ alongside other high-risk assets like cryptocurrencies and meme stocks when growth seemed all but certain.

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

However, estimates of retail account trading from VandaTrack don't support that idea. The firm estimated that more than $1.1 billion of individual investor dollars flowed into QQQ versus $860.4 million into TQQQ as of Tuesday, meaning institutions like hedge funds are likely to be taking on the risk of the leveraged contrarian strategy.

Robert Johnson, a finance professor at Creighton University and a former deputy CEO of the CFA Institute, believes the inflows can be attributed in part to traders not having experienced a drawn-out bear market in the past several years. While there have been a few flash crashes, notably in late November 2018 and in March 2020 as the pandemic took hold, asset prices recovered fairly quickly.

He also argues that the ETF industry has grown to the point where it grants access to almost any narrative an investor would want to get behind, even if prevailing economic conditions don’t support it.

“The ETF world … is so complete that a lot of people can invest according to what they believe, and I think that’s on balance a good thing,” Johnson said. “Now there’s a flip side to that, and it’s that, in the wrong hands, leveraged ETFs can be very dangerous.”

 

Contact Dan Mika at [email protected], and follow him on Twitter

Dan Mika is a reporter for etf.com. He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.