Systematic investors are preparing to increase their exposure to the stock market after a period of significant deleveraging, according to Citadel Securities. The firm says the next mechanical flow is likely to involve re-leveraging rather than further unwinds.
Leveraged exchange-traded fund assets under management dropped to $154 billion last month, a 42 percent decrease from $218 billion recorded at the end of June.
The semiconductor sector saw the sharpest decline in leveraged ETF holdings, now standing at approximately $31 billion. That unwind has cleared the path for new capital.
Scott Rubner, head of equity and derivatives strategy at Citadel Securities, said the leverage reset has largely run its course, creating opportunity for systematic strategies to add exposure as market volatility falls.
Other factors supporting increased buying include improving market breadth and near-record low correlation between stocks. Investors are also showing greater willingness to pay for upside exposure.
Evidence of normalized leverage demand appears in funding markets. One-month equity financing spreads compressed from a peak of 138 basis points above SOFR to approximately 50 basis points today.
Individual traders also show renewed interest, with retail investors posting net buying on Citadel Securities' platform during the past week.
Households are logging $7.5 billion daily in passive ETF inflows, providing a consistent base of support for equity markets.
The end of earnings season is reopening the corporate buyback window. Companies are authorized to repurchase more than $1 trillion of their own stock, the largest amount on record at this point in the calendar year.
Citadel Securities anticipates investors will increase their leverage, moving past the recent deleveraging cycle as market focus shifts from positioning adjustments back to company fundamentals. The S&P 500 currently trades at $7,728, down 0.3 percent on the day, while the Nasdaq is at $26,445, down 0.6 percent.
