A corner of the ETF market drawing regulatory scrutiny is pushing for still shorter-term speculation.
Defiance ETFs has submitted paperwork to the US Securities and Exchange Commission for a series of leveraged funds that would seek to double the moves of some individual stocks — over periods measured in just hours, rather than days.
Leveraged exchange-traded funds, once used mainly to magnify moves in broad indexes, now offer retail investors amplified bets on popular companies through the use of derivatives. Defiance intends to shorten the clock again.
Existing two-times leveraged funds aim to deliver twice a stock’s move over a single trading day. Defiance’s proposed strategies would effectively restart that bet several times before the market closes.
The filing lists products tracking the hottest tech names including Meta Platforms Inc., Microsoft Corp., Nvidia Corp., Palantir Technologies Inc. and Tesla Inc. The proposed funds would use swaps or options to maintain roughly twice the underlying security’s exposure, rebalancing six times throughout the trading day instead of just once at the close, per the filing. If approved, the funds wouldn’t use a single price for each reset and would instead utilize a time-weighted average price, the paperwork says.
As a loose example: A trader expecting Nvidia to jump on a piece of news, for example, could buy the fund during one of its hourly periods, targeting roughly twice the stock’s move during that window rather than its move over the entire day. At the next reset, the two-times target starts again.
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For an active trader, that means the leverage is recalibrated closer to the moment the trade is made. It also means gains and losses begin compounding again and again within the same session.
The idea is to give “investors a different way to express an intraday view,” said Sylvia Jablonski, chief investment officer at Defiance ETFs. “Rather than targeting 2x the return from one market close to the next, an hourly reset product seeks to deliver its stated multiple over a much shorter, one-hour measurement period.”
The filing comes as regulators are already wrestling with how far the ETF industry should be allowed to push such products. The SEC has slowed proposals for funds offering three, four and five times leverage while examining a broader wave of increasingly speculative products.
The backlash has spread beyond the US. South Korean regulators tightened rules this summer after a rush into leveraged funds tied to SK Hynix and Samsung Electronics Co. was followed by sharp losses and a public outcry over the products, with the matter even reaching the president.
The country’s leveraged ETF frenzy has since tempered as regulators introduced more hurdles for retail investors. After South Korea began requiring investors to complete five days of simulated investing, domestic demand for some of the hottest leveraged products dwindled.
ETF issuers have long stressed that the products are trading tools rather than conventional buy-and-hold investments. Hourly resets would take that premise considerably further. Each gain or loss becomes the starting point for the next period, allowing returns to compound repeatedly within the same trading day. That can help when a stock moves steadily in one direction. Conversely, in a choppy or downmarket, that same compounding can work against the investor and create greater volatility drag.
James Seyffart, an ETF analyst at Bloomberg Intelligence, is somewhat skeptical.
“I’m not fully convinced this will offer completely differentiated exposures when compared to daily resetting products aside from very specific hourly periods around earnings or other announcements,” he said.
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