Individual investors are buying fewer stocks, but using more leverage

United States

Individual investors are buying fewer stocks in what appears to be a seasonal, pre-Tax Day lull ahead of April 15, but their interest in highly leveraged exchange-traded funds is heating up at the same time.

Retail wallets tend to “feel the gravitational pull” from the U.S. income-tax deadline in mid-April, and that’s no different this year, said Marco Iachini and Lucas Mantle of Vanda Research, in a Wednesday note. They found cash equity purchases hovering just shy of their post-COVID average near the 44th percentile. Activity could be set to pickup by in early May, they said, just in time for AI favorite Nvidia Corp.’s NVDA, +0.12% first-quarter 2024 earnings call.

Use of leverage by individual investors, however, has “increased noticeably” in recent weeks, they noted. They pointed to the chart below, which shows retail flows into the four most-bought exchange-traded funds since the beginning of the year: The SPDR S&P 500 Trust SPY, Invesco QQQ Trust QQQ, ProShares UltraPro QQQ TQQQ and Direxion Daily Semiconductor Bull 3X Shares SOXL (Vanda said TQQQ and SOXL flows are adjusted for leverage),

Vanda Research

SPY tracks the S&P 500 SPX, while QQQ QQQ tracks the Nasdaq-100 NDX. TQQQ aims to deliver three times the daily performance of the Nasdaq-100 before fees and expenses, while SOXL aims to deliver three times the performance of NYSE Semiconductor Index

An expand pool of a few more heavily traded funds and retail inflows, adjusted for leverage, easily clears the highs from the last AI-fueled rally that ran from May to July of last year, Iachini and Mantle wrote.

Vanda Research

But it isn’t clear the interest is being driven by FOMO, or fear of missing out, they said, noting that gauges of retail sentiment have taken a step back.

“A plausible explanation then is that investors are trying to make their capital work harder through leveraged bets,” they wrote. ”We don’t take issue with that logic, but it does inherently make retail participation much more susceptible to equity pullbacks.”