The Rise of High-Risk Investment Vehicles
Amplifying Gains and Losses
A corner of the stock market has experienced unprecedented growth in 2024, with traders flocking to leveraged single-stock ETFs in search of amplified returns on popular names like Nvidia. These ETFs have attracted over $20 billion in assets this year alone, offering investors a way to supercharge their gains – and losses – in a single stock.
The Evolution of ETFs
Since their introduction in the early 1990s, ETFs have revolutionized the investment landscape by combining the diversification of a mutual fund with the daily trading liquidity of a single stock. However, a new breed of ETFs has emerged, catering to investors with a strong appetite for risk. Single-stock ETFs track the price of one stock, using leverage to amplify returns.
A New Era of Trading
“These are vehicles that mass retail has never had the ability to trade before, until now,” says Todd Sohn, an ETF specialist at Strategas. The GraniteShares 2x Long NVDA Daily ETF, for example, seeks to deliver double the move of Nvidia’s daily price fluctuations. On a single day, the ETF returned nearly 5%, compared to a 2.5% gain for the underlying stock. Year-to-date, the ETF is up 346%, outpacing the stock’s 170% gain.
Billions Pouring In
Investors are pouring billions of dollars into these funds, making for some highly successful ETF launches in recent months. The 2x Nvidia ETF has attracted over $5 billion in assets, while other popular leveraged ETFs tracking stocks like MicroStrategy and Coinbase have each attracted over $1 billion in assets.
A Risky Proposition
While these ETFs offer the potential for outsized returns, they are inherently risky, much more so than owning the underlying stock. Sohn warns that leveraged ETFs are incredibly volatile and best used as a trading vehicle, rather than a long-term investment. Options decay, which occurs when options expire with zero value and new contracts are purchased, can also erode returns.
The Dark Side of Leverage
The leveraged downside tied to these ETFs can be painful. During Nvidia’s summer correction, the 2x long Nvidia ETF lost about 63%, prompting concern from investors. Similarly, MicroStrategy stock is down about 33% from its late November peak, while the 2x ETF that tracks the stock is down more than 60% over the same period.
A Growing Trend
The popularity of single-stock leveraged ETFs recalls another high-risk investment trend – the zero-day option. While the risks appear to be limited to individual traders, the trend is worth watching. As Todd Rosenbluth, head of research at TMX VettaFi, notes, “While single-stock leveraged ETFs have gained in popularity this year, they remain relatively small in size.”
What’s Next?
Going forward, risk-on traders seem less concerned about the risks associated with single-stock ETFs and more focused on which one will take off next. As Sohn asks, “The next question is… what name catches on next with the trading crowd?” Only time will tell.
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