(Bloomberg) -- A pioneer of the $100 billion derivatives-powered ETF market has filed for more than 70 new funds in one go, in a bet that amped-up investment products will boom anew despite fears of industry overcrowding and investor exhaustion.
New York-based Direxion on Friday submitted paperwork to the Securities and Exchange Commission to introduce a fresh batch of leveraged and inverse ETFs, in the largest-ever filing spree from an asset manager, according to Bloomberg Intelligence.
Included in the long list of trades offering to amp up returns on single stocks — in both a bullish and bearish direction — are those favored by retail traders, such as PayPal Holdings Inc., Roblox Corp. and Shopify Inc. Direxion also listed trades involving the semiconductor, consumer services and real estate sectors.
The record number of filings come as day traders with bullish bets get crushed with stocks down again Tuesday after the S&P 500 entered a correction last week. Since the market’s drop from its February peak, assets held by a cohort of leveraged-ETF issuers have plunged as much as 18%, data compiled by BI show.
“Issuers are no longer just throwing spaghetti onto the wall to see what sticks, but the lasagna and pizza, too,” said Henry Jim, ETF analyst at Bloomberg Intelligence. Direxion may not launch all products that it filed for, but the flurry of paperwork allows the firm to gauge investor interest, Jim said.
Derivatives-based ETFs, a once-niche corner of the market, have boomed since 2019 when US regulators eased constraints for launching new funds. Since then, more than 300 such products have been launched, with Direxion, ProShares Advisors LLC, Tidal Investments LLC, GraniteShares Inc., Tuttle Capital Management LLC and AXS Investments LLC dominating the space.
The market, however, is getting more crowded and risky, according to Morningstar Inc.’s Bryan Armour. Retail interest in less popular stock names is also far from guaranteed, unless volatility brings in speculative investors, per Armour.
“Daily leveraged and inverse ETFs are among the largest wealth destroyers in the ETF market,” Armour, the firm’s director of passive strategies research, said. “They typically do very poorly over the long term due to the structural deficiencies of resetting leverage daily.”
A spokesperson for Direxion acknowledged the filings as part of their “ongoing efforts to offer innovative investment solutions.” Direxion, which in December had roughly $47 billion in assets under management, in the past has stressed the importance of daily monitoring and highlighted its focus on educating clients.
The craze for high-octane products has grown in recent years, fueled by retail traders in search of the cycle’s hottest trades. Leveraged ETFs have amassed nearly $106 billion in assets in the US and attracted around $17 billion in flows in the past 12 months, data compiled by Bloomberg show. But just as easily as these products intensify gains, so, too, do they pile on losses when markets fall.
The biggest losers year-to-date are Ether-related ETFs, led by ProShares Ultra Ether ETF (ticker ETHT), 2x Ether ETF (ETHU) and T-Rex 2X Long Ether Daily Target ETF (ETU), Bloomberg data show. All of them are down by more than 70%. Ether, the second-largest digital asset, is trading just 43% lower as risky investments including Bitcoin decline. On the flipside, the inversion version of Ether — a strategy that amps up returns during down-markets — is up by a whopping 124% so far this year.
Industry critics have long worried that investors might not read the fine print and risk losing money, when allocating money to risky ETFs. Dangers include technical risks like volatility drag — when big valuation swings diminish returns — and the erosion of net-asset value. The products are often meant for speculative investors who want to bet on and against an asset’s performance for no more than a single day, as the funds can veer off course when tracking shares over a longer period.
Mohit Bajaj, for one, is bullish on the industry’s growth prospects. The director of ETFs at WallachBeth Capital notes first-mover advantage still holds sway, meaning trailblazing issuers can gather the most assets.
“I don’t think it’s over-crowded yet. The demand has proven that there still an appetite,” Bajaj said. “Direxion has done a great job of branding their ETFs and is a top tier ETF provider.”
(Adds chart. A previous version corrected description of fund products to clarify their derivatives-based nature)
