A view of the floor of the New York Stock Exchange on Sunday. [AP]
A view of the floor of the New York Stock Exchange on Sunday. [AP]

As the leveraged ETF market surges, Wall Street is increasingly turning to a strategy that flips the volatility these products generate into a trading opportunity. The daily rebalancing that leveraged ETFs carry out to hit their target returns amplifies price swings in both directions — and traders are now exploiting that dynamic through an "intraday momentum" strategy, particularly in semiconductor stocks.

Pierre Trecourt, co-founder and chief operating officer of PremiaLab, said the intraday momentum strategy returned 8.1% in the semiconductor sector from April through June, according to Bloomberg on Sunday.

The semiconductor sector posted a Sharpe ratio of 2.5 over that period. A Sharpe ratio above 1 is generally considered strong. By contrast, a strategy applied to the broader US stock market over the same period returned just 0.4%, with a Sharpe ratio of only 0.8 — underscoring how the semiconductor sector's volatility translated directly into returns.

Leveraged ETFs adjust their positions around the close of each trading session to deliver two or three times the daily return of an underlying asset. When markets rise, they buy more shares; when markets fall, they sell — adding pressure in the direction prices are already moving and reinforcing existing trends.

The intraday momentum strategy bets that once a stock begins moving in a particular direction during the session, that trend will continue. Following strict rules, traders buy rising stocks and sell falling ones, wagering that an established directional move will persist.

Florian Ielpo, head of macro at Swiss asset manager Lombard Odier Investment Managers, said the strategy "makes money on days with big moves in either direction — up or down — but tends to lose a little on quiet days." He added that last month was one of high volatility and weak returns for technology stocks, "and that is precisely the environment where this strategy shows its value."

Banks have long offered intraday momentum strategies — which systematically capture short-term trends — as part of their quantitative investment strategies, and demand has been growing rapidly. The number of live semiconductor-focused intraday momentum strategies has more than tripled since their launch in 2024, while strategies targeting US technology stocks broadly have risen about 80 percent since late 2021.

"Semiconductor-focused intraday momentum strategies have seen meaningful growth over the past few years," Trecourt said.

Hao Yang Yang, a strategist at JPMorgan Chase, said returns from intraday momentum strategies over the past two months had been "dazzling." He compared current market conditions to "1998–1999, when the tech revolution produced unprecedented earnings uncertainty and individual stock volatility at historic highs."

In South Korea, trading in leveraged ETFs plunged after financial regulators tightened rules to curb demand for such products, but interest in intraday momentum strategies on Wall Street shows no sign of fading.

Demand for bullish bets has revived so far this month, fueling expectations that intraday momentum strategies could regain traction.

Jitesh Kumar, a derivatives strategist at Societe Generale, said the growing influence of leveraged ETFs had heightened interest in intraday trend strategies. "Some leveraged ETFs have seen significant corrections recently, but interest in intraday trend strategies is likely to continue," he said.

Ielpo said investor positioning had been substantially cleared out after recent weeks of risk-asset reduction, and that appetite for leveraged products was returning. "These fund flows do not weaken intraday trends — they sustain them," he said. "And intraday momentum strategies are precisely designed to capture that movement."

Debriefing: The Herald Business international desk unpacks the hidden stories behind the hottest global issues. Leave your questions in the comments!


yckim6452@heraldcorp.com