The riskiest bets in the stock market are the most popular

As tech stocks plummeted for the fourth straight day in January, Evan Fetter, a 25-year-old in the US military, saw an opportunity to make a move.

The trade was submerged at times, but Mr. Fetter says he hopes to hold the shares until his investment is worth $50,000, and then plans to use the money for a down payment on a property.

“Stuff like this is a buying opportunity,” Mr. Fetter said of the 2022 declines in major U.S. indexes. He says he’s been stashing money from his earnings at Chick-fil-A and other restaurants in stocks for years and wanted something with him prospect of higher returns.

Tech stocks have lost some of their appeal as the US Federal Reserve hikes interest rates and imposes a premium on corporate earnings.


Photo:

Michael Nagle/Bloomberg News

Mr. Fetter is one of many traders who have turned to exotic exchange-traded products this year, designed to load up bets on everything from stocks to commodities to esoteric financial derivatives. Market volatility, driven in part by the war in Ukraine, the global inflation eruption and questions about the pace of global growth, have prompted a rush for these risky assets.

Over the coming week, traders will analyze Friday’s economic data on consumer spending and the monthly jobs report for clues as to the direction of the stock market and the health of the economy.

According to FactSet data, the ProShares UltraPro QQQ has become the most actively traded exchange-traded product this year. More than 119 million shares changed hands on an average day this year, up 65% year-on-year and one of the highest in the past decade. The fund’s assets, known as TQQQ, are up 58% over the past year to about $18 billion as of Thursday. The fund is down 32% in 2022, compared to the 9.6% decline in the Nasdaq 100 index.

After a decade of fueling market gains, tech stocks have lost some of their appeal as the Federal Reserve is raising interest rates. Higher interest rates are now weighing on corporate earnings, making shares in 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 add to their investments or bet on them to decrease. Funds under management that offer such inverse equity exposure have risen to $11.5 billion this year, up 42% year over year and the highest since 2011, according to data from Morningstar Direct from the end of February. Assets in leveraged equity funds are down overall from last year but remain near the highest levels of the last decade.

One such inverse product is the ProShares UltraPro Short QQQ ETF, or SQQQ, which benefits from a fall in the Nasdaq 100 index. The technology stocks in the benchmark have plummeted this year, prompting a rush for bets against the index and helping the fund soar 17%.

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

Options activity pegged to TQQQ hit a record on Jan. 24 as the Nasdaq Composite fell as much as 4.9% before embarking on a furious recovery to post a 0.6% gain on the day, one of the wildest trading sessions of the past decade. Retail purchases of leveraged ETFs hit their highest levels 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 more as short-term trading tools rather than a place to park cash for long periods of time. In some cases, keeping it for weeks or even days can eat into returns.

Trading activity in some products tied to the Cboe Volatility Index, or VIX, has also hit highs. The ProShares Ultra VIX Short-Term Futures ETF, known as UVXY, was the third most traded exchange-traded product this year. It is a leveraged product designed to benefit from rising volatility, a trade that can quickly backfire.

In Europe, an exchange traded product called GraniteShares 3X Short Nvidia Daily ETP is the second most traded ETP on the London Stock Exchange,

Show FactSet data. It is expected to rise when Nvidia Corp. shares. falling, and has recently fallen sharply.

The history of riskier exchange-traded products is littered with explosions that have caused traders huge losses. One product that has bet against the VIX, the exchange-traded VelocityShares Daily Inverse VIX Short Term Exchange Traded Note, abruptly closed in 2018 after a bout of fluctuation, causing chaos in the derivatives market.

Market volatility was driven in part by the war in Ukraine, accelerating global inflation and questions about the pace of global growth.


Photo:

Courtney Crow/Associated Press

Just last week, WisdomTree Commodity Securities Ltd. announced it would close a nickel-linked product that tripled commodity exposure after the war in Ukraine sparked wild price swings and untied trading. Earlier in the month, the Company said it would shut down Trade one of his inverse nickel bets. Both products are worth “zero” or “less than zero,” the company said in a note to investors, adding, “Investors should not expect to be paid for the securities they hold.”

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

Despite the turmoil, several retail investors say they continue to buy tech stocks’ downturns and expect the recovery of the past few weeks to continue.

Joe Basile, a 23-year-old investor who works at an Apple store in Staten Island, says he initially suffered losses trading options related to TQQQ when he first learned about the fund. The fund is huge Fluctuations meant that some contracts he bought quickly became worthless.

But he also won. Mr Basile said he traded bearish options to benefit from a decline in the fund on March 16, when the Fed hiked rates for the first time since 2018. Contracts rose more than 60% in a matter of hours as interest rates rose, fueling intraday volatility in the stock market.

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

“The technology sector has been strong for about 10 years now and I don’t see why and how that would change,” Mr Castrillon said. “Of course there is a risk that it will only pull me down further.”

Write to Gunjan Banerji at gunjan.banerji@wsj.com

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