Short-bias ETFs see big inflows on stock market pullback bets

Short-bias exchange-traded funds, which bet against stock indexes and fast-rising sectors like technology and artificial intelligence, are drawing strong inflows as lofty prices and policy risks spur some investors to position for a pullback.

According to LSEG Lipper data, global short-bias funds drew $3.7 billion in September, the biggest monthly inflow in nearly three years. U.S. funds accounted for $2.2 billion of that while Japanese and South Korean funds took in $653 million and $424 million respectively. They have added another $1.4 billion so far this month.

Flows into short-bias funds have often increased during times of stress, delivering strong gains in the 2008 financial crisis when broader funds struggled. While such inflows are not always a precursor to downturns, rising allocations to funds that profit from falling markets are seen as a sign of unease, with valuation risks mounting.

This year, AI optimism has lifted megacap tech firms such as Nvidia, Microsoft and Oracle, pushing the S&P 500, Nasdaq and Dow to fresh peaks. The S&P 500 and Nasdaq hit record highs on Thursday, up 15% and 19% this year, while the Dow has gained 10%.

The forward 12-month price-to-earnings ratio of the MSCI World index was at a near 5-year high of 20.4 at the end of September.

However, the surge in equities has elicited a wave of warnings about the risk of a looming correction.

The Bank of England has pointed to rising risks of a market reversal, citing U.S. auto credit stress and political deadlocks in France and Japan, while the Fed faces pressure that could spark a sharp repricing of U.S. assets.

International Monetary Fund chief Kristalina Georgieva spoke on Wednesday about the risks to the world economy from potentially large corrections in lofty stock markets.

JPMorgan Chase CEO Jamie Dimon also warned of a heightened risk of a significant correction in the U.S. stock market within the next six months to two years, the BBC reported.

So far in October, the Direxion Daily Semiconductor Bear 3X Shares has led with $255 million of inflows, followed by $200 million into the ProShares UltraPro Short QQQ and $143 million into the ProShares Short S&P 500.

Now, when markets repeatedly peak as the prospects of artificial intelligence lift valuations of several technology heavyweights including Nvidia, Microsoft and Oracle, similar warnings are stacking up.

International Monetary Fund chief Kristalina Georgieva warned on Wednesday about the risks to the world economy from potentially large corrections in lofty stock markets.

Meanwhile, JPMorgan Chase CEO Jamie Dimon warned of a heightened risk of a significant correction in the U.S. stock market within the next six months to two years, the BBC reported.

“Jamie Dimon is like the Greenspan of today,” said Mark Malek, chief investment officer at Siebert Financial, who back then was working on multiple acquisition deals on behalf of Lucent Technologies, which itself went from being an internet market darling to a poster child for Greenspan’s irrational exuberance.

In December 1996, Greenspan posed a seemingly innocuous rhetorical question during a dinner speech: “How do we know when irrational exuberance has unduly escalated asset values?”

The market reaction was immediate. Asian stocks fell 3%; those in Europe followed suit and the next morning, the S&P 500 tumbled 2%. But within days, those losses had evaporated, and within a few weeks, stocks had not only regained all that lost ground but were trading 10% above the levels they were when Greenspan spoke.