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The past month has been a wild one for active traders. The market's two moods have many a short term trader wondering whether now is the time for courage or caution. Of course, no one knows with certainty what the next few weeks hold, but there may be clues in this week's flow of funds within some of the most actively traded ETFs on the market.

Among the 1000+ ETFs available today, there are over 200 which most consider purely speculative - leveraged, inverse, and exotic funds. While these 200+ funds represent only a bit over 4% of the trillion dollar ETF market, their average daily volume is closer to 20% of the ETF sector, and since many are 2x or 3x leveraged, they represent an even greater share of profits & losses. Because they're so actively traded they often hold clues about the whims of "hot money" hedge funds and traders.

One valuable - but frequently overlooked - insight to take from ETF markets is the recent trend in new share issuance (or redemption). Unlike traditional company stock, the number of shares outstanding for an ETF can fluctuate daily. If large scale investors wish to significantly increase their exposure of fund XYZ, they can simply request that the fund's sponsor issue more shares at the fair market value (NAV) for the fund in question, thus avoiding the need to buy on the open market, risking market impact. Similarly, if a large shareholder wishes to sell, they can request that the fund sponsor redeem a large block of shares at net asset value.

Significant issuance and redemption of shares can be one of the best indicators of which way market sentiment is heading.

Below are the past week's net issuance & redemptions for the six largest cap speculative ETFs. The left chart shows the week's change in price for each fund, and on the right is the change in assets of each fund driven by issuance or redemption of shares.

Most notable is that VXX, the short term volatility ETN, rose more than 10% on the week's increased anxieties, but nearly 9% of shares were redeemed. Those that were long volatility seem to be banking their profits rather than speculating on further volatility increases. On the other end of the spectrum, FAS (3x long ultra bullish) saw a more than 6% increase in shares outstanding this week as speculators anticipate upward movements.

click to enlarge images

On a slightly longer term, similar VXX and FAS trends are in place, though we also see SH (S&P short) and SDS (double short) adding significant shares as some speculated on more downside risk in the markets.

Risk on.

Overall for the 200+ speculative ETFs, new shares were issued at approximately 1.5% of total AUM in the past week, and more than 5% in the past month - a sign that both the bulls and the bears have increased appetite for risk.

Source: Risk On: Funds Flow Into Speculative ETFs