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.”

There’s a not-so-secret way one exchange-traded fund is handily outperforming the S&P 500 this year: Put the money on women.

The Hypatia Women CEO ETF (WCEO) was up 21% year to date as of market close Friday, compared with under 14% for the S&P 500. The fund’s methodology is to invest in big public companies led by women, and that has clearly paid off, at least in its relatively short history. The fund recently reached two milestones: It just cleared $10 million in assets; and it now has a three-year track record. “We’re now actually getting many independent advisors interested in this thematic, which as far as we know is the only financial product in the world that targets the performance of female CEOs,” said Patricia Lizarraga, managing partner of Hypatia Capital.

XX Returns

The actively managed fund, which represents about $11 million, appears to be the only US ETF with a focus on women-led companies. Hypatia’s thesis is that such businesses have a greater likelihood of outperforming, as it’s no accident when women are picked to lead them. “For women in today’s corporate America, it’s harder for them to get to the top,” Lizarraga said. “It’s that additional challenge, their resilience and the fact that boards have a fiduciary duty to pick the best person to lead the organization … Those facts are what lead to our outperformance.”

While the fund is ahead of the S&P 500 this year, it slightly lags its benchmark, the S&P SmallCap 600 Index, which has returned 23% year to date. A lot of investors view it as a thematic fund more than anything, Lizarraga said. Its top holdings include several oil and gas companies, as well as International Seaways. It also has significant allocations to Franklin Resources, Voya Financial and other firms in asset management and insurance. “We’re [providing] diversification away from the Magnificent 7, and that has helped in the performance,” Lizarraga said. Still, the fund’s software-company exposure hurt it in the second quarter (women-led tech companies are more often on the software than hardware side, she noted). “But we’ve seen that turn around … The death of software was overstated.”

There are several other funds in the US with wider investment strategies supporting corporate gender diversity or women’s empowerment:

• The $337 million State Street SPDR MSCI USA Gender Diversity ETF (SHE), which invests in companies committed to diversity across their organizations, has returned 22% year to date.
• The $59 million Impact Shares Women’s Empowerment ETF (WOMN), which focuses on companies with policies supporting gender equality, has returned 10%.
• The $659 million Impax Global Women’s Leadership Fund (PXWIX), which is a mutual fund that allocates to companies that seek to advance gender diversity and equality, is up 15%.

She’s All That: Distribution has been a challenge for WCEO — it’s not even available through Ellevest, which caters to women. Having three years of returns to show could help change that, Lizarraga said. “We want to engage with more financial advisors and more RIAs that will do the due diligence to see how robust our processes are and how our investment thesis will outperform.”

You know what they say: CLOs one door, and another opens.

One of the fastest-growing areas of the ETF industry is in collateralized loan obligations, strategies that hold below-investment-grade, floating-rate loans with varied levels of income and risk. Janus Henderson’s CLO ETF (JAAA), the largest fund in this category, recently surpassed $30 billion in AUM, according to the company. The milestone is the latest indicator of these funds’ ongoing popularity, but it’s not alone. In June, Pacer ETFs and Barings launched two funds focusing on CLOs and secured credit, and earlier this year, Fidelity brought two new active strategies to market. “With the growth of the CLO market and the way the ETFs trade, they’re able to take active strategies into the CLO space, which is kind of a whole new area for the wealth market,” Greg Stumm, CEO of American Beacon Partners, told ETF Upside in June.

Roadside CLO Assistance

Part of the recent demand stems from the Federal Reserve’s decision last month to hold interest rates steady, between 3.5% and 3.75%. There were some CLO outflows in December due to rate cuts, said John Kerschner, global head of securitized products at Janus Henderson. After that, people expected rates to continue falling, he said, which would make longer-duration products more attractive to investors. “Given that floating-rate products like AAA CLOs are almost no duration, that led to people allocating out,” he said. “What we like to tell investors is: ‘It’s very hard to have a view on rates that is consistently right, and it’s very hard to time the markets.’”

Still, launches in the CLO category have been surging since last year. Investors like them because of their downside protection and excess yield compared to corporate bonds, and now diversified CLO portfolios are possible because of the ETF wrapper. According to data from ETF Trends:

• Investment-grade CLO ETFs have 30-day yields in the 5%-6% range.
• Although CLOs have been around for a long time, they’ve only been available as an ETF to individual investors since 2020 with Janus Henderson’s fund being one of the first launched in October of that year.

Inflation Nation: Another reason CLOs might make sense against the current macroeconomic backdrop is inflation. From the ongoing conflict in Iran spiking energy prices to friction in supply chains, inflation is only set to increase, and that makes a CLO fund valuable, Kerschner said. “The buildout of AI may be deflationary eventually, but it’s inflationary right now,” he added. “There are a lot of things pointing to structurally higher inflation.”