Investors try to catch ‘falling knife’ with bets on risky funds during chip rout

Investors poured billions of dollars into risky leveraged funds tracking semiconductor companies during July and August, even as those products suffered heavy losses, as they tried to position for a possible rebound in the sector.

The biggest leveraged exchange traded fund tracking chip stocks — called Direxion Daily Semiconductor Bull 3X Shares — attracted almost $7bn of net inflows during July and the first two weeks of August, according to Morningstar data.

The ETF offers triple-leveraged exposure to the NYSE Semiconductor Index, a group of 30 US chip companies. While the index fell more than 20 per cent from its peak, the fund plunged 70 per cent between its June peak and subsequent low.

Single-stock leveraged funds tracking chipmaker SK Hynix and memory group Sandisk also attracted sizeable inflows during and after the chip stock rout.

“Buying the dip and selling the rip” has been a popular strategy in many leveraged ETFs, said Ben Snider, US equity strategist at Goldman Sachs, referring to how investors have been buying as the market falls and then selling when stocks rally.

Leveraged ETFs use derivatives to amplify returns and have been particularly popular with retail investors looking to juice their returns in an AI boom fuelled by the hundreds of billions of dollars that hyperscalers are spending on infrastructure.

Semiconductor stocks, seen as among the biggest beneficiaries of this investment, soared globally but have tumbled over the past couple of months on concerns over the durability and likely profitability of the boom, leading to hefty losses in leveraged funds tracking the sector.

However, some investors have used the sell-off as an opportunity to buy in the hope of a rebound.

A fund run by CSOP Asset Management offering double the daily return of South Korean chip giant SK Hynix — a stock that on a number of occasions rose or fell 10 per cent or more in a single day during the market sell-off — attracted more than $1bn of net inflows over the past six weeks. Inflows came even as the fund plunged 86 per cent from peak to trough.

Investors also poured a net $350mn into a leveraged ETF tracking Sandisk in the same period, a US memory company that tumbled 46 per cent in July alone. That product dropped 85 per cent from its June high to its July low.

“We have noted time and again that there is clear evidence of ‘buy the dip’ in the flows [into leveraged ETFs],” said Anshul Gupta, head of derivatives research at Barclays. “Buying the dip is like catching a falling knife.”

Retail investors in South Korea, where these products had become hugely popular but where they have also been blamed for amplifying moves in indices and stocks, were particularly hard hit during the downturn. Goldman Sachs estimates that more than 1.2mn leveraged retail accounts in South Korea had triggered margin calls — demands for more security for loans — in mid-July.

Korean regulators have since introduced new caps on individual exposure and made it mandatory for investors to take a week-long course before trading in single-stock funds.

Nevertheless, despite the tightening of regulations, the inflows suggest many small investors remain keen to bet on these risky products.

“A big part of the froth might have come out of the market, but I don’t believe the behaviour has changed,” said Fabiana Fedeli, chief investment officer for equities at M&G. “I am concerned about that.”

She added: “We have seen regulators starting to look into these products . . . although it does not appear those steps are effective enough.”

Not all of these types of products have seen net inflows. Popular ETFs offering leveraged exposure to US chipmakers Nvidia and Micron have logged millions of dollars of outflows since the chip stock sell-off started in July.

The flows come in during a summer of “brutal outcomes” for investors in single-stock leveraged and inverse ETFs, according to Inès Barahhou, head of ETF advisory at research house Kepler Cheuvreux, with 43 funds losing more than 90 per cent of their value over the past 12 months.

These include ETFs linked to AI and semiconductor stocks Intel, ASML, TSMC, AMD, SK Hynix and Sandisk, as well as crypto asset-related Strategy and Coinbase.

There had also been a record 122 delistings of single-stock leveraged funds so far this year, Barahhou said, surpassing the record full-year tally of 98 set in 2023, with five of them based on Strategy alone.

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“We had a lot of volatility during the month,” Barahhou said. “If you have high volatility then [leveraged ETFs] are awful, you lose a lot of money. It’s a casino, it’s not investing.”

However, this type of product remains popular, with new launches running at 303 as of August 12, according to data from Kepler Cheuvreux’s Trackinsight arm, within touching distance of 2025’s full-year record of 324.

“We are seeing a new business model arising. Leveraged single-stock ETFs are being launched, tested against investor demand and, if that demand fails to materialise, quickly closed as issuers move on to new opportunities,” said Barahhou. Fees are so high that business models work even if only 20 per cent of launches are successful, she added.

Additional reporting by Ramsay Hodgson