Exchange traded fund traders who played the recent bout of wild market swings doubled down on risk and piled into leveraged products.
Traders have increasingly turned to exchange traded funds and notes that use leverage or amplify potential returns on oil, gold and natural gas, even as many bets have plunged after the commodities retreat, reports Dan Strumpf for the Wall Street Journal.
For instance, the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, has attracted over $1.2 billion in net inflows over the past six months, according to Lipper data. UWTI now sees more action than Apple (NasdaqGS: AAPL), Bank of America (NYSE: BAC) and other prominent stock names – UWTI volume jumped over 300 million shares Monday, and volume was at around 76.1 million mid-Friday after the ETN dipped 3.2%.
While the leveraged aspect of these geared products may produce greater returns, investors are exposed to greater risks as well. Many traders have also recently picked up the products as a way to play larger swings.
For example, UWTI jumped 8.4% last week. The Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEArca: JNUG) and the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT), which take the 3x or 300% daily performance of a group of large gold miners and junior miners, surged to intra-day highs of 18.5% and 12.8% last Friday, respectively.
VelocityShares said that institutional investors and money managers show growing demand for these types of strategies.
On July 30, financial adviser L. Michael Ladd said he bought shares of the leveraged NUGT and kept buying on the dips in anticipation of higher prices after gold miners touched multi-year lows. Ladd, though, only allocated a small percentage of money to the position, about 3% to 6% of investible assets. [Oversold Gold Miner ETFs May Have Opportunity to Rebound]
As of June 30, hedge fund Tontine Associates LLC was the largest investor of UWTI, holding about 1.6 million shares, according to FactSet, and Trading firm Virtu Financial Inc also held one million shares of UWTI.
Potential investors should also understand how the products work, especially during longer periods. In times of increased volatility, leveraged ETF returns can fall behind their intended 2x or 3x strategies. The VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ), a popular way to track leveraged natural gas price movements, has declined 58% this year while the unleveraged United States Natural Gas Fund (NYSEArca: UNG) declined 14%. VelocityShares also states that the product is not not suitable for long-term investing. [Do You Know How Your Leveraged ETFs Work?]
“Our tactical trading products are designed for sophisticated investors,” Nick Cherney, head of exchange-traded products at VelocityShares, which is owned by Janus Capital Group Inc, told the WSJ. “We market them to institutional traders who are often trading multiple times a day and are using the products as part of more systematic strategies.”
For more information on leveraged fund products, visit our leveraged ETFs category.
Max Chen contributed to this article.