A risky corner of the ETF market has boomed this year as YOLO traders chase the rally

By Investor Empires On Dec 21, 2024

The fund that tracks Nvidia stock is one of the most popular leveraged ETFs.Slave Vlasic/Getty Images; Chelsea Jia Feng/PI

The risky corner of the stock market has boomed in 2024 amid another year of stellar gains.
Traders have piled into leveraged single-stock ETFs, seeking to amplify returns on popular names like Nvidia.
These types of ETFs have attracted more than $20 billion in assets in 2024.

While the stock market was an early frontier The gambling craze that swept America In 2024, investors are leading a boom in a relatively new type of investment product that can magnify gains — and losses — in a single name.

Enter single-leveraged exchange-traded funds.

Since their introduction in the early 1990s, ETFs have been pioneers in offering the characteristics of a mutual fund — owning a basket of diversified stocks — but offering the liquidity of day-trading a single stock.

But even after 30 years, the humble ETF is seeing new updates that cater to investors with a strong appetite for risk.

Instead of owning a basket of stocks, single-stock ETFs track the price of a single stock, which the fund will try to get returns from by pushing it up.

“These are instruments that mass retail trading has never had the ability to trade before, until now,” Todd Sohn, an ETF specialist at Strategas, told Business Insider.

the Granite Shares 2x Long NVDA Daily ETF It seeks to offer double the move Nvidia Daily price fluctuations.

On Friday, Nvidia stock jumped about 2.5% amid a broader market rebound, while shares of the 2x Nvidia ETF returned nearly 5%. Year to date, the 2x Nvidia ETF is up 346%, compared to a gain of 170% for the stock.

“Traders are looking to implement high-conviction ideas through them,” Son said.

Investors are pouring billions of dollars into these funds, leading to the launch of some very successful ETFs in recent months.

The 2x Nvidia ETFs have attracted more than $5 billion in assets, while other popular leveraged ETFs track stocks like Accurate strategy and Coinbase Each has attracted more than $1 billion in assets.

This is big for the ETF space, where the break-even point for most ETF products is around $50 million in assets, according to white-label ETF provider Alpha Architect.

Year to date, more than 60 ETFs have been launched to cater to individual stocks, attracting combined assets of $23 billion, according to data provided by Sohn.

While this amounts to relative peanuts in the $10 trillion ETF world, it’s still noticeable, and the funds are seeing a lot of use.

“They appear more often on the list of most actively traded ETFs,” Son said, adding that ETFs linked to Nvidia, Tesla, Coinbase and MicroStrategy are the most popular.

But while they can deliver huge returns, these investment vehicles are inherently risky, much more so than owning the underlying stocks.

Leveraged ETFs are incredibly volatile, and given options decay, they are best used as a trading vehicle, “not a set-it-and-forget-it vehicle,” Son said.

Options decay refers to the idea that even if the underlying stock is trading sideways, leveraged ETFs are likely to move less as the options expire at zero and new contracts are purchased.

The downside associated with the leverage of ETFs can be painful.

During Nvidia’s summer correction, the 2x Nvidia ETF lost about 63%, alarming Redditors who invested.

“I’m lost a lot now on NVDL (without my NVDA) and I’m trying to think of what makes the most sense.” The Redditor said in a post on the Nvidia subreddit earlier this year.

Another example is MicroStrategy stock, which is down nearly 33% from its peak in late November, while the 2x ETF tracking the stock is down more than 60% over the same period.

The trading frenzy points to another popular high-risk investment trend –Zero day option. The contracts are a bet on a stock’s movement for one day, with the option expiring on the same day the trader buys it. The market took off during the pandemic trading boom, and has become so big that JPMorgan warned last year that its popularity could spark bouts of volatility in the broader market.

But for now, the risks appear to be limited to individual traders who buy them and not to the broader market.

“Although single-leverage ETFs have gained popularity this year, they are still relatively small in size,” said Todd Rosenbluth, head of research at TMX VettaFi. “For example, NVDL has $5.5 billion in assets, while… NVIDIA stock is worth $3 trillion. Business insider.

Going forward, risk-on traders appear to be less concerned about the risks associated with single-stock ETFs and more focused on which ones will take off next.

“The next question is… which name will catch the attention of the trading public? Palantir seems to be one candidate (and it has twice as many ETFs there). But we’ll see what else happens,” Son said.

Read the original article on Business insider