Risky ETFs Drawing Investors Amid Elusive Profits

Risky ETFs Drawing Investors Amid Elusive Profits

‘Investors should never really touch’ these funds, analyst says.

Reviewed by: Shubham Saharan
Edited by: Shubham Saharan

Risky exchange-traded funds are drawing investors seeking profit in a tumbling market, and at least one analyst finds the trend alarming.  

Investors have poured nearly $25 billion into leveraged and inverse ETFs this year, up 47% from the $17 billion that flooded in at the start of the 2008 financial crisis, Morningstar Direct data shows. The inflow into leveraged and inverse ETFs represents 6.1% of the more than $403 billion the ETF industry brought in this year, versus the 1% the sector saw 2021.  

The investment vehicles differ greatly from traditional ETFs, and are often used for shorter duration trades. Inverse funds move counter to their underlying index, and, like leveraged funds, sometimes use borrowed capital to magnify wins. Analysts caution the strategy can also increase losses.  

“These are ETFs that investors should never really touch,” said Bryan Armour, director of passive strategies research for the North American arm of Morningstar Research Services. The overwhelming increase in assets into these funds could be attributed to the “buy the dip” mindset, he added.  

Still, as the S&P 500 and Nasdaq have lost more than 20% year to date; inflation remains at highs unseen for decades; and central banks across the globe deliver historic rate hikes, investors are searching esoteric bets for returns.  

Some inverse and leveraged funds are doing exactly that, with the ProShares UltraPro Short QQQ (SQQQ), the ProShares UltraPro Short S&P500 (SPXU) and the Direxion Daily S&P 500 High Beta Bear 3X Shares (HIBS) up more than 92%, 60% and 30% year to date, respectively, according to ETF.com data. Meanwhile, typical index-tracking funds, such as the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ), are yielding lows akin to their underlying indices.  


Source: ETF.com 


“The odds are stacked against these types of funds,” Armour said, pointing to increasing market volatility. “The winners in these products are going to be market makers and the professional issuers and such, not investors.”  

“They're expecting sort of a rebound or to take advantage of short term,” he added, referring to investors. “Short-term bull markets do occur. But it's a lot easier to look back at a chart and say, ‘buy here, sell there’ than it is to know when to buy and sell without seeing the future.”  

Contact Shubham Saharanat[email protected]   

Shubham Saharan is a markets reporter at etf.com. Before joining the company, she reported for Bloomberg and the Financial Times. Saharan is a graduate of Barnard College of Columbia University.