Professional investors with a bullish or bearish conviction on artificial-intelligence stocks and looking to magnify their profits with leverage can now do so with two new exchange-traded funds.
The Direxion Daily AI and Big Data Bull 2X Shares ETF seeks to achieve 200% of the daily returns from its benchmark, the Solactive US AI & Big Data Index. The bear equivalent of this fund seeks to garner 200% in the opposite direction of the gauge’s move. The funds are designed to reflect only single-day moves and won’t seek to accumulate gains over time.
The craze for AI stocks has been the most popular trade of the year, predicated on the transformative potential of the technology on businesses and society. Leveraged funds have raked in $12.4 billion of 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 rally having stalled amid concerns over excessive valuations.
“AI is here to stay and people are looking to trade that on both the bullish and bearish directions,” said Edward Egilinsky, managing director at Direxion Funds. “Irrespective of the short-term moves, there will always be interest in this sector.”
Overall, the slide in volatility and lower premiums for puts has made broader stock market hedging more attractive, and some VIX call spread buying was seen last week and Monday.
“The rise in interest rates that has pushed up SPX forwards increases call premiums relative to puts,” said Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence. “This has eased the entry for collar strategies that sell calls and buy puts. The decline in the SPX skew, which is close to the low of the last 10-year range, has also reduced the cost of this strategy.”
The Solactive AI index, the funds’ benchmark, has jumped 13% this year, taking its gains since late 2022 to 120%. Its members range from most of the Magnificent Seven stocks such as Apple Inc. and Alphabet Inc. all the way to relative minnows like Gigacloud Technology Inc. and SoundHound AI Inc.
While leveraged funds are becoming sought after, ETF investors have turned cautious on thematic funds including those in the AI, automation and innovation sectors where they have withdrawn $1.4 billion, compared to the nearly $2 billion they deposited last year.
Egilinsky said the new funds are not meant for retail investors who do not have high risk appetite. They target sophisticated investors who understand leverage dynamics and can take short-term losses. Some money managers with long positions in the spot market may also use these funds to hedge their positions for a single day, to cover an event like an earnings report.
The Solactive index trades at a forward price-earnings ratio of 29.3 times, compared with 20.7 for the S&P 500 Index. After reaching a record high on March 7, the measure has declined 2.8%. “Multiples for these companies are high,” Egilinsky said. “Sustaining valuations will be key.”
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