Biggest Leveraged ETF Takes in $1.5 Billion as Japan Stocks Sink

Japanese Stocks Followed U.S. Shares Higher

Employees work at the Tokyo Stock Exchange. The Next Funds Nikkei 225 Leveraged Index ETF took in 177.4 billion yen ($1.5 billion) this year, boosting assets by 7 percent through Monday even as stocks tumbled, according to data compiled by Bloomberg.

Photographer: Yuriko Nakao/Bloomberg
  • Fund's assets swell even as it posts 20 percent retreat
  • Nomura Asset hasn't decided whether to stop new orders again

Investors are putting more money into Japan’s giant leveraged exchange-traded fund than any other equity ETF around the world as stocks in Tokyo extend their worst start to a year on record.

The Next Funds Nikkei 225 Leveraged Index ETF took in 177.4 billion yen ($1.5 billion) this year, boosting assets by 7 percent through Monday even as stocks tumbled, according to data compiled by Bloomberg. The fund’s current size of 786 billion yen is about the same as when its manager, Nomura Asset Management Co., suspended orders for two months from October. The ETF uses futures to produce twice the Nikkei 225 Stock Average’s return, and is down 20 percent in 2016.

The Nikkei 225 has dropped 10 percent this year amid a global equities selloff and is less than two percentage points away from a bear market.

The leveraged fund caused a stir last year after doubling in size in just five months, with investors blaming it for amplifying moves in the futures market. The ETF has become so popular that it’s often the most-traded security on the Tokyo exchange. Nomura Asset hasn’t decided whether to halt orders again, said Kazumasa Hironaka, a spokesman at the fund manager.

“We’re monitoring changes to volumes in futures as well as our assets daily, and are carefully deciding whether we can continue to maintain our correlation” with the Nikkei 225, Hironaka said. “It’s likely contrarian investing.”

Nomura Asset cited a lack of liquidity in the Osaka futures market when it stopped taking orders in October.

The Bank of Japan acknowledged the focus on the fund in a paper published Jan. 14, saying leveraged ETFs had drawn attention for increasing price swings and causing stress in the market. There’s adequate liquidity to soak up the orders and the funds’ tendency to attract inflows when the market’s dropping and see redemptions as shares rise reduces their impact, according to the central bank.

“Assets have blown up to the levels when they last closed it, so it’s probably not far off until they stop orders again,” said Tomoichiro Kubota, a senior analyst at Matsui Securities Co. “At these levels, people are starting to worry again that the fund is impacting the futures market.’

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