Retail investors are purchasing triple-leveraged US equity ETFs at a rapid pace.

Retail investors are flocking to highly leveraged US exchange traded funds, pouring around $5.2 billion into the top 22 leveraged ETFs in the year up to April, according to data from VandaTrack. This surge in interest comes as uncertainty over interest rates and geopolitical tensions in the Middle East have fueled market volatility.

Ben Slavin, global head of ETFs at BNY Mellon Asset Servicing, noted that investors are using leveraged ETFs to speculate on market downturns or hedge their long positions. This shift in investor behavior marks a reversal from the first quarter when money was being pulled out of passive funds.

Despite concerns about the potential for sharp losses, retail investors continue to be drawn to leveraged ETFs, which can magnify both gains and losses. Morningstar Direct data shows that inflows into leveraged ETFs have wiped out the outflows seen in January and February, with nearly $4.4 billion flowing into these funds in March and April.

However, the US Securities and Exchange Commission has warned investors about the risks associated with leveraged and inverse ETFs, cautioning that their performance can differ significantly from the underlying assets they track, especially in volatile markets. These products must rebalance daily to deliver their targeted returns, which can lead to significant and sudden losses.

Despite these warnings, the popularity of leveraged ETFs continues to grow, with some investors taking significant risks in pursuit of short-term gains. As market volatility persists, retail investors will need to carefully consider the risks and potential rewards of investing in these highly leveraged funds.