Leveraged ETFs Create New Profit Paths in Tech Stocks
(Bloomberg) — The leveraged ETF boom is creating new ways to profit from sudden bursts of volatility in tech stocks.
The daily rebalancing of the funds tracking some of the most volatile names and sectors has amplified gains and losses, most recently for South Korean retail investors. It’s also added to swings during trading sessions, creating pockets where traders can take advantage. One way is to use an intraday momentum strategy, an area where banks have long offered Quantitative Investment Strategies to systematically capture short-term trends.
Intraday momentum “earns on large trending days, in either direction, and it usually bleeds on quiet ones,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “July was a volatile and negative month for tech, and that is exactly the environment in which this trade shows its worth.”
The semiconductor sector has been the hottest area for the intraday strategies, according to Pierre Trecourt, co-founder and chief operating officer of Premialab. It’s returned about 8.1% from April to June, with a 2.5 Sharpe ratio, a measure of risk-adjusted returns. That compares with a 0.4% return and 0.8 Sharpe ratio for a broader US equities index.
“Semiconductor-focused implementations of this intraday momentum approach have seen meaningful growth in recent years,” said Trecourt. He noted that live strategies in that area have more than tripled since launching in 2024, while they’ve expanded by about 80% since the end of 2021 for the broader US tech industry.
A basic intraday momentum strategy uses strict rules to buy into rallies and sell into dips, betting that the direction will continue. It performs best with highly volatile stocks on highly volatile days, said Yangyang Hou, a JPMorgan Chase & Co. strategist whose team wrote a paper that looked at the trades using five-minute price intervals, buying when the price was 1% above the previous close and selling when it fell below it, flattening the position at the end of the session.
The returns were “stellar” over the past two months, Yangyang wrote in an email — “a pattern reminiscent of 1998/99, when the technology revolution created unprecedented earnings uncertainty and record high single-stock volatility,” she added.
To be sure, while the earnings season generally brings good profits for intraday momentum strategies on single stocks, results diverge depending on the names, the JPMorgan strategists wrote.
Nvidia Corp. has had significant call overwriting activity since 2023, which has offset the short gamma effect from leveraged ETFs. Meanwhile, Micron Technology Inc. has seen put buying over the past month, funded by call selling, resulting in net negative gamma dealer positioning that boosted intraday momentum strategies.
The July unwind from some of the stocks tracked the most by leveraged funds has reduced their total assets under management from a record high, which for now should ease some of the biggest swings from rebalancing. Trading in the ETFs has slumped in South Korea after authorities took steps to slow demand.
Leveraged U.S. ETFs’ daily rebalances net sold about $150 billion of equity exposure from early June through July 29 as funds deleveraged, with total assets shrinking about $70 billion from a June peak, according to JPMorgan strategists.
“The prominence of these leveraged ETFs has raised interest in intraday trend strategies, and many of these strategies at SG have seen the best performance since 2022,” said Societe Generale SA derivatives strategist Jitesh Kumar. “Despite the recent drawdown in some of these ETFs, the interest in intraday trend is likely to remain.”
Intraday momentum on some underlyings may get a renewed boost from a resurgence in demand for upside exposure at the start of August, with volatility skew on the S&P 500 and Nasdaq 100 indexes collapsing to the lowest in years amid a flood of call buying.
“With positioning now much cleaner after weeks of derisking, investors are returning to the theme through levered instruments,” Ielpo said, referring to leveraged ETFs. “And these products are part of the mechanics themselves: Their end-of-day rebalancing pushes in the direction of the day’s move, a flow that sustains rather than dampens the intraday trends the strategy captures.”
