Investors have flocked to riskier, leveraged stock bets in recent weeks, Vanda Research said.
These increased flows come as the stock market has hit new record highs.
Strategists said investors could try to make their capital grow further through leverage.
The stock market has soared towards the records in the first three months of the year, and retail traders increasingly built on that momentum with riskier bets.
According to Vanda Research, the use of leverage by individual investors has continued to intensify in recent weeks.
As the chart below illustrates, retail investors have reduced their purchases of broader market ETFs like SPY and QQQ – which track the S&P 500 and Nasdaq – while increasing their exposure to triple-effect funds of leverage as stocks reach all-time highs.
This trend comes as the major averages posted strong gains in the first quarter, the Dow Jones Industrial Averageup 4.91% since the start of the year and S&P500and the Nasdaq Composite up 10.1% and 10.59%.
Risky betting on markets including crypto and meme stocks are on the rise againthis time bucking the trend toward high interest rates that wiped out those deals two years ago when the Federal Reserve began tightening monetary policy.
“If we then expand the pool of leveraged ETFs to a few more heavily traded funds, we see that retail fund inflows (adjusted for leverage) have now easily surpassed the highs seen during the latest AI-powered rally in May-July 23,” Vanda strategists wrote this week.
The chart below shows the increase in retail net purchases of leveraged ETFs in February and March 2024. Data is based on the 22 largest leveraged ETFs in the United States, as of March 26.
Another potential factor, meanwhile, is that after about two years, the average retail portfolio has finally come out of the red following the brutal bear market of 2022. Now that the focus is on generating gains rather than Recovering losses, traders can feel more confident in taking on higher risk, Vanda said.
Analysts added that they expect retail investors to turn to contrarian bets, buying dips or selling during rallies. They also say retail is diversifying away from top-gaining stocks like the Magnificent Seven and toward other stocks, with data suggesting the cohort is looking to take advantage of any increased magnitude of gains sooner scholarship holders.
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