(Bloomberg) — As tech stocks led a selloff in U.S. equities that started last week, investors used the pullback to plow billions into funds tracking the Nasdaq — just in time for the next leg down.
Almost $1.7 billion was added to the Invesco QQQ Trust exchange-traded fund, ticker QQQ, in the final two days of last week. Traders also poured nearly $600 million into the ProShares UltraPro QQQ ETF (TQQQ) on Thursday, a triple-leveraged product aiming to deliver three times the daily performance of the Nasdaq 100.
That could make Tuesday particularly painful for some of those who piled in. The benchmark tech gauge was about 2.5% lower as of 10:20 a.m. in New York.
“Given the past ‘buy the dip’ profile of tech, there is definitely a cohort of investors expecting the same this go around,” said Nathan Thooft, Manulife Investment Management’s head of global asset allocation.
There was caution elsewhere in flow data, however. With the S&P 500 finishing the week 2.3% lower and the Cboe Volatility Index jumping to the highest since June, several so-called defined outcome products tracking the benchmark gauge also lured cash.
Otherwise known as buffers, they offer to limit an investors downside risk in exchange for a cap on potential gains.
“Investors shouldn’t disregard the warning signs,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. “Higher volatility will lead to margin calls, which usually doesn’t have a good outcome.”
Nonetheless, the S&P 500 remains up about 4% for the year, while the Nasdaq 100 has gained a remarkable 30%. The blistering rally had sent its 14-day relative strength index to more than 80, but as of Tuesday it had dropped below 50. Anything above 70 is considered by some technical analysts to be a sign that an asset has risen too fast and is due to decline.
QQQ has lured almost $16 billion in 2020 to take total assets to $137 billion. The leveraged TQQQ has seen $126 million exit, but the fund still has more than $8 billion in assets.
Meanwhile, short-positioning, as measured by the percentage of shares that have been lent out, remains well below the one-year average for both funds, according to Markit data.
“Leveraging the index (NDX) versus the single stocks (FAANMG) must look like an attractive strategy for investors at this point,” Sophie Huynh, multi-asset strategist at Societe Generale SA in London, said in an email, referring to the group of megacap-tech shares that includes giants such as Facebook Inc. and Apple Inc. “What we like for example is to be long Old Tech vs New Tech. So looking for growth still, but out of FAANMG.”
(Updates prices throughout.)
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