Direxion Opens Leveraged Inverse ETFs for AI Stocks

(Bloomberg) — Professional investors with a bullish or bearish conviction in artificial intelligence stocks and looking to amplify their profits through leverage can now do so with two new exchange-traded funds.

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The Direxion Daily AI and Big Data Bull 2X Shares ETF seeks to achieve 200% of the daily returns of its benchmark, the Solactive US AI & Big Data Index. The bearish equivalent of this fund seeks to gain 200% in the opposite direction of the evolution of the gauge. The funds are designed to reflect only a single day’s movements and will not seek to accumulate gains over time.

The AI-related stock craze has been the hottest trade of the year, based on the technology’s transformative potential for business and society. Leveraged funds have generated $12.4 billion in inflows this year, on track to surpass last year’s $19.2 billion, according to Bloomberg Intelligence. The introduction of Direxion’s ETFs comes at a time when AI stocks are at a crossroads, with the recovery stalled due to concerns about excessive valuations.

“AI is here to stay and people are looking to trade it in both a bullish and bearish direction,” said Edward Egilinsky, managing director of Direxion Funds. “Regardless of short-term developments, there will always be interest in this sector.”

The Solactive AI index, the fund’s benchmark, has jumped 13% this year, bringing its gains since the end of 2022 to 120%. Its membership ranges from most Magnificent Seven stocks, like Apple Inc. and Alphabet Inc., to relative minnows like Gigacloud Technology Inc. and SoundHound AI Inc.

While leveraged funds are increasingly sought after, ETF investors have been cautious about thematic funds, particularly those in the AI, automation and innovation sectors, where they withdrew $1.4 billion, compared to nearly $2 billion deposited last year.

Read more: Traders fleeing ‘microbubbles’ withdraw billions from thematic ETFs

Egilinsky said the new funds are not aimed at retail investors who don’t have a big appetite for risk. They target sophisticated investors who understand the dynamics of leverage and can experience short-term losses. Some fund managers with long positions in the spot market may also use these funds to cover their positions for a single day, to cover an event such as an earnings report.

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The Solactive Index trades at a forward price-to-earnings ratio of 29.3 times, compared to 20.7 for the S&P 500. After hitting a record high on March 7, the measure fell 2.8%. .

“The multiples of these companies are high,” Egilinsky said. “Maintaining valuations will be essential. »

(Updates with the opening of ETFs, minor changes throughout)

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