The riskiest bets on the stock market are the most popular

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He poured $15,000 into the ProShares UltraPro QQQ, an exchange-traded product designed to triple the daily return of the Nasdaq-100 index, bidding for what he called a “once-in-a-lifetime win.”

The trade has been underwater at times, but Mr Fetter says he hopes to hold the shares until his investment reaches $50,000, at which time he plans to invest the money in a down payment on a property real estate.

“Things like this are a buying opportunity,” Fetter said of major U.S. index declines in 2022. He says he’s been hiding money in stocks for years thanks to his income at Chick-fil-A and other restaurants and wanted something with the prospect of higher returns.

Mr. Fetter is one of many traders who have turned to exotic exchange-traded products this year designed to energize betting on everything from stocks to commodities to esoteric financial derivatives. Market swings caused in part by the war in Ukraine, soaring global inflation and questions about the pace of global growth have sparked a rush into these risky investments.

Over the coming week, traders will scan economic data on consumer spending and Friday’s monthly employment report for clues about the stock market’s trajectory and the health of the economy.

The ProShares UltraPro QQQ has become the most actively traded exchange-traded product this year, according to FactSet data. More than 119 million shares changed hands in an average day this year, up 65% from a year ago and one of the highest levels in a decade. Assets in the fund, known as TQQQ, have jumped 58% over the past year to around $18 billion on Thursday. The fund fell 32% in 2022, compared to the 9.6% drop in the Nasdaq-100 index.

After driving market gains for a decade, tech stocks have lost some of their appeal as the Federal Reserve raises interest rates. Higher rates place a premium on corporate earnings today, which tends to make stocks of companies whose earnings may lie in the future less attractive.

Three of the other 10 most actively traded exchange-traded products also offer leverage or inverse market exposure, allowing investors to amplify their investments or bet on a decline. Assets under management in funds that offer such inverse equity exposure jumped to $11.5 billion this year, up 42% from last year and the highest level since 2011, according to Morningstar Direct data as of late February. Overall, leveraged equity fund assets were down from a year ago, but still near decade highs.

One such inverse product is the ProShares UltraPro Short QQQ ETF, or SQQQ, which benefits from a decline in the Nasdaq-100 index. Benchmark tech stocks have fallen this year, causing a rush to bet against the index and helping the fund jump 17%.

The two Nasdaq funds were among the top ETFs bought by individual investors this year, behind only a fund linked to the S&P 500 index and the Invesco QQQ Trust, according to data provider Vanda Research.

Options activity tied to TQQQ hit a record high on Jan. 24, when the Nasdaq Composite fell 4.9% before rebounding furiously and posting a 0.6% gain for the day, l one of the craziest trading sessions of the last decade. Retail purchases of leveraged ETFs hit their highest level in at least two years on the day, according to data provider Vanda Research.

These products can be among the most dangerous. Many are designed to be used as short-term trading tools rather than a place to store money for long periods of time. In some cases, keeping them for weeks or even days can eat away at returns.

Trading activity in some products linked to the Cboe Volatility Index, or VIX, has also spiked. The ProShares Ultra VIX Short-Term Futures ETF, known as UVXY, was the third most actively traded exchange-traded product this year. This is a leveraged product meant to take advantage of rising volatility, a trade that can quickly backfire.

In Europe, an exchange-traded product known as GraniteShares 3X Short Nvidia Daily ETP, is the second most traded ETP on the London Stock Exchange, according to FactSet data. It is designed to rise when shares of Nvidia Corp. are declining and have recently fallen precipitously.

The history of riskier exchange-traded products is littered with blowouts that left traders with big losses. A product that bet against the VIX, the VelocityShares Daily Inverse VIX short-term exchange-traded note, closed abruptly in 2018 after a volatility crisis, wreaking havoc on the derivatives market.

Just last week, WisdomTree Commodity Securities Ltd. announced it would shut down a nickel-linked product that offered triple exposure to the commodity, after the war in Ukraine triggered wild price swings and trading went haywire. Earlier in the month, the firm announced that it would stop trading one of its nickel reverse bets. Both products were worth “zero” or “less than zero,” the company said in a notice to investors, adding that “investors should not expect to be paid for the securities they own.”

A spokesperson for WisdomTree said the recommended holding period for short and leveraged products is one day and investors should understand the products and their risks before investing.

Despite the turmoil, many individual investors say they continue to buy declines in tech stocks, expecting the rebound of recent weeks to continue.

Joe Basile, a 23-year-old investor who works at an Apple store in Staten Island, says he first suffered losses on trading options tied to TQQQ when he first discovered the fund. The huge swings in the fund meant that some contracts it bought quickly became worthless.

But he also had victories. Mr Basile said he was trading bearish options to take advantage of a drop in the fund on March 16, when the Fed moved to raise interest rates for the first time since 2018. Contracts jumped more than 60% within hours as the rate increased. fueled intraday stock market volatility.

Harold Castrillon, 29 in Astoria, NY, who works in human resources, said he poured money into TQQQ earlier this year. After polling people on a Reddit forum to see if it was a good idea to play with the fund, he decided to invest around 13% of his portfolio. Ideally, he says, investment returns in the coming years will allow him to retire early.

“The tech industry has been strong for about 10 years now and I don’t see why and how that would change,” Castrillon said. “There is, of course, the risk that this will drag me down even further.”

This story was published from a news agency feed with no text edits

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