Investors yank $500m from super-leveraged US tech fund

An exchange traded fund designed to amplify the moves of red-hot US tech stocks has just suffered its worst ever week of outflows, suggesting that investors are growing wary of highly stretched valuations.

Investors pulled $491m from the ProShares UltraPro QQQ ETF last week in the biggest weekly withdrawal since the ETF launched a decade ago, according to data from Bloomberg.

The ETF — known by its ticker TQQQ — is a risky investment, aiming to use leverage to deliver three times the daily performance of the Nasdaq 100 stock index, which tracks the biggest companies listed on the tech-heavy market.

The outflows failed to make much of an impression on the fund’s assets, which closed the week at a record $7.1bn, propelled by a strong performance for stocks including Apple, Amazon, Alphabet and Tesla. The fund’s holdings are up about two-thirds in value from the start of the year, roughly three times the return of the benchmark.

Column chart of Weekly fund flows for ProShares UltraPro QQQ ($m) showing Investors pull record sum from leveraged tech ETF

But the redemptions from the UltraPro QQQ fund — the largest leveraged ETF — could be a sign that investors are easing out of tech stocks after a momentous rally, said Ben Johnson, head of ETF research for Morningstar.

The tech-focused benchmark includes mega-cap stocks that have acted as haven assets during the Covid-19 crisis and represent more than a fifth of the US stock market — the highest proportion on record.

“We’ve seen quite a run in the Nasdaq 100 in recent months and it’s likely time for many to consider locking in the gains,” he said.

On Monday tech stocks were the hardest hit in a rapid afternoon sell-off after California rolled back most of its economic reopening measures to contain the pandemic. Such an announcement would typically trigger a shift toward tech stocks, “but in this case they felt the biggest pain — I found that telling,” said Jim Tierney, chief investment officer of US concentrated growth at AllianceBernstein. “Maybe people are saying they’ve run pretty far and maybe investors are taking some profits.” 

The Nasdaq 100 is up 21.4 per cent for the year, compared with a 2.3 per cent loss for the S&P 500. The price-to-earnings ratio, a popular yardstick of valuation, has also widened between the two indices. Investors are paying 33 times the trailing year’s profits for companies in the Nasdaq 100 compared with 21 times for stocks in the S&P 500 — a gap that has nearly doubled since the start of the year, and is at its widest since December 2007.

Line chart of Price-to-earnings ratio* showing Investors pay up for tech stocks

“It’s very much about price-to-earnings multiple expansion rather than earnings growth,” said Mr Tierney.

The year’s best performer in the Nasdaq 100 is Zoom, the video conferencing group that has become a market favourite after a surge in use of its product during lockdowns. The stock has nearly tripled in value. Tesla, the second-best performer, is up more than 250 per cent for the year.

ETFs that use borrowed money to magnify returns have drawn criticism in the past. Carl Icahn, the billionaire investor, has repeatedly taken aim at such instruments over the years, saying they have helped turn the stock market into a “casino on steroids”.

A “short” version of the ProShares Ultra QQQ ETF — designed to deliver three times the inverse daily performance of the Nasdaq 100 — had $261m of inflows over the week, the most in more than three months.

“This category of funds is not intended to serve investors with a long-term orientation,” said Mr Johnson of Morningstar. “It’s about capitalising on short-term moves in the market.”