Leveraged ETF Craze Turns Its Sights to Other Funds

Imitation is the sincerest form of flattery.

What, then, is taking a strategy and applying leverage to it? Or conversely, shorting it? In the ETF business, companies probably shouldn’t take it personally when a competitor rolls out a 2x version of their hot new fund — something that’s become common in the leveraged ETF bonanza of late.

Recently, for example, Rex Shares and Tuttle Capital Management are prepping four ETFs that would go either 2x long or 2x inverse on Roundhill’s brand new Neocloud and Photonics & Optics funds. The companies filed with the Securities and Exchange Commission for those products a day after Roundhill’s funds hit the market. Similarly, Roundhill also filed for its own 2x long version of LYTE.

“To the best of my knowledge nobody has been able to get critical mass in 2X themes,” Matthew Tuttle, CEO of Tuttle Capital Management, told ETF Upside. Traders interested in leverage want to focus on individual stocks, with a few exceptions, he said. “DRAM was an exception because it got so big so fast … We’re looking at LYTE and NCLD in kind of the same way.”

Double Impact

“In the world of ETFs, you have Vanguard, BlackRock, State Street, Invesco, Schwab and JPMorgan — the heavyweights. Then, there is this midcap tier,” said Todd Sohn, chief ETF strategist at Baird Strategas. Launching another S&P 500 index fund is hardly a way to compete, and the smaller players know it, he noted. “So they’re chasing new themes. And the problem with that is there are only so many dollars that can go around to these themes … It becomes a knife fight, but there aren’t enough assets to go around.”

There are already plenty of leveraged ETFs that focus on the big indexes, and increasingly, single stocks. New thematic ETFs, particularly successful ones, have also become fair game. For example, there are at least four funds that go long or short on Roundhill’s $27 billion Memory ETF (DRAM), including the $630 million 2x Long DRAM Daily Target ETF, which is a collaboration between Roundhill and T-REX. The T-REX 2x Inverse DRAM Daily Target ETF (RAMZ) is not a collaboration, similar to the leveraged and inverse versions of LYTE and NCLD that the company is prepping. Another firm, Leverage Shares, filed last week for a 2x ETF focused on LYTE.

“We take these filings as a compliment, since firms only file 2x versions of funds that are clearly resonating with investors,” Roundhill CEO Dave Mazza told ETF Upside. “However, there is a big difference between identifying an opportunity early and chasing one after the fact.”

Currently, leveraged and inverse equity ETFs represent a very small slice of the market by assets, but the category is growing wildly:

• The funds’ assets represented 1% of the $15.7 trillion ETF market as of the end of July, per data from Morningstar Direct.
• Investors have pulled money from leveraged equity ETFs but added to inverse equity ETFs on a net basis, with total flows accounting for just over 0.1% of the more than $1 trillion in US ETF flows this year.
• Of the 621 leveraged equity ETFs on the market, 276 launched this year, and many others are in registration. Of the 166 inverse equity ETFs, 23 have been added year to date.

Multiplicity: Call it the spaghetti cannon. Or a strategy of spray and pray. It’s inevitable some of the ETFs in this year’s crop may not make it much longer than a year. “That [strategy] only goes so far. Then you end up with 10 ETFs with nothing in them,” Sohn said. “There are so many thematic ETFs coming out in the next three months. I have no idea who is buying them.”