Investment money in the U.S. leveraged products market is shifting from single-stock bets to index-based products, according to an analysis presented by a U.S. asset manager. Investors who experienced sharp price swings in individual names such as semiconductor stocks have begun looking for more diversified exposure.
Ki-suk Oh, head of Asia at REX Financial, said at a press briefing on the 28th that "about $5 billion flowed out of U.S. single-stock leveraged products in the third quarter of this year, while about $9 billion flowed into index-based products." Last year, by contrast, about $10 billion flowed into single-stock leveraged products while about $14 billion left index-based products. The single-stock-driven flows that continued through the first half of this year reversed in the third quarter.
REX Financial is a U.S. asset manager specializing in income, thematic, and leveraged and inverse exchange-traded products. It manages about $8 billion (roughly 11 trillion won) in assets and has more than 100 listed products across exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Its flagship products include the T-REX 2X Long SKHY Daily Target ETF (HYNX), which tracks twice the daily return of SK hynix American depositary receipts (ADRs), and MicroSectors' FANG+ 3X Leveraged ETN (FNGU), which provides triple-leveraged exposure to large U.S. technology stocks.
Oh said heavy volatility, including sharp declines in semiconductor and memory-related names, has shaped investor choices. "Over the past year and a half, investors made heavy use of single-stock leveraged products, but after experiencing severe volatility they are moving toward more diversified products," he said.
REX Financial is broadening its index-based lineup to reflect that shift in demand. The firm plans to offer SPYU, a 4X leveraged ETN tied to the Standard & Poor's 500 index and already trading in the United States, under MicroSectors, its leveraged and inverse ETN brand. MicroSectors operates with REX designing the products and Bank of Montreal (BMO) of Canada issuing the notes. It currently offers 39 ETNs across 19 product families covering semiconductors, artificial intelligence, country equity markets and commodities.
REX uses ETNs to build leveraged exposure to more narrowly defined targets. "ETNs let us extend exposure into areas that ETFs could not provide, or could not provide adequately," said Scott Acheychek, chief operating officer of REX Financial. "Through ETNs, we are able to offer very precise investment opportunities."
Still, he cautioned against holding leveraged products for long periods. The average holding period for MicroSectors ETNs is about three days. "Young investors sometimes make the mistake of chasing returns too aggressively," Acheychek said. "With leveraged products, it is important to set a holding period and an appropriate exit point."
