The retail army is back leading records in one corner of the stock markets

(Bloomberg) — The era of meme stocks may be over, but day trading in one corner of the stock market is setting pandemic records.

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Transaction volumes in a controversial breed of leveraged ETFs reached an all-time high this week as retail and institutional investors alike weathered the severe turmoil in US stocks. The world’s $17 billion of inverse ETFs traded seven times the average for the past five years on Wednesday, according to data compiled by Bloomberg.

Investors flocked to these derivative-based products in this year’s market turmoil to bet on dips and to hedge everything from tech stocks to small companies. In terms of value, about $15 billion of inverted ETPs traded on Wednesday, or five times the average.

Retailers have been a major driver of activity, according to strategists at JPMorgan Chase & Co. The ProShares UltraPro Short QQQ ETF (SQQQ Index) – which offers three times the inverse yield of the Nasdaq 100 – has attracted a record $592 million from retail investors in the five days to Tuesday, they said.

The Direxion Daily Small Cap Bear 3X Shares ETF (TZA) and Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS) — which aims to triple the inverse performance of the Russell 2000 and S&P 500, respectively — also saw higher net Retail purchases since the start of the pandemic, JP Morgan said.

“The sudden surge in inverted ETF volume shows that traders are rushing to hedge their portfolios or speculate on further declines,” said Jason Juepfert of Sundial Capital Research. “When this activity rises relative to overall volume, it indicates that sentiment has tilted a lot to the downside, which usually corrects with at least a short-term rally in equities.”

Inverted and leveraged ETFs have been at the center of market crashes for volatility in stocks, oil, gas and others in recent years, resulting in many product closings and periods of low investor interest. Wall Street regulators said they are considering new rules to better protect investors from such “complex” investments. Their structure means they can lead to quick losses as well as big gains, and most are designed to be held for short periods.

Assets and volumes have boomed in the past year as traders look for a new edge in fast-moving markets. Global assets in vehicles nearly doubled from the end of 2018 to $128 billion last year.

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In the United States, $31.6 billion in inflows helped increase assets by 55% in 2021 to $88.6 billion. The data shows that it currently boasts about $76.3 billion. But while inverse ETFs are a preferred tool among retail traders, big money investors may also play a role with record high trading volumes.

“While some of this is a ‘retail entrepreneur’, large funds are widely used by hedge funds and institutional traders to make directional bets on short time horizons,” said Dave Nadig, chief investment officer at ETF Trends.

Proponents argue that ETFs can be a useful trading tool for those who understand risk. They are easily accessible, and can be a relatively cheap way to hedge a portfolio especially in the current market conditions.

“As implied volatility has increased, driving up the cost of options, retail investors may now prefer inverse ETFs as a visually cheaper alternative,” JPMorgan strategic analyst Ping Cheng said by email.

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