Leveraged bets on Nvidia could become increasingly risky if Wall Street’s tech-driven selloff persists.
ETFs designed to amplify Nvidia’s daily price movements by up to twice have surged in popularity as investors sought to capitalize on the stock’s dramatic rise this year. The total assets in these ETFs have soared to about $6.3 billion this week, up from just $342 million in December 2023.
However, despite Nvidia’s impressive 130% rally year-to-date, recent volatility in tech stocks might heighten the risks for those betting on Nvidia’s fluctuations.
On Wednesday, Nvidia’s stock dropped nearly 7%, causing the leveraged ETFs to plummet by as much as 13.5%. This decline came amid a broader market pullback, with the S&P 500 falling 2.3%—its steepest drop since late 2022—following disappointing earnings reports from Tesla and Google. Nvidia’s shares continued to decline by around 3% on Thursday.
The upcoming week could bring more volatility, as investors await earnings reports from major companies like Apple, Microsoft, Meta, and Amazon.
“Leverage works both ways,” noted Todd Sohn, an ETF analyst at Strategas Securities. “While it’s advantageous in a rising market, any sudden downturn can lead to rapid and painful losses.”
The growing popularity of these ETFs reflects the intense interest in Nvidia’s stock, even as it increases potential risks for investors if the stock’s performance falters.
“Leveraged ETFs are designed for those comfortable with high risk,” said Will Rhind, CEO of GraniteShares.
‘VOLATILITY DRAG’
While it’s unclear whether investors were net buyers of leveraged ETFs related to tech stocks during Wednesday’s drop, both GraniteShares and REX Shares, which offer Nvidia-linked ETFs, reported that traders used the dip as a buying opportunity.
This behavior aligns with recent trends. The GraniteShares 2x Long Nvidia Daily ETF, which doubles Nvidia’s daily gains or losses, has seen $1.06 billion in net inflows over the past month, even as Nvidia’s stock fell nearly 6% up to Wednesday.
Similarly, the T-Rex 2x Long Nvidia Daily Target ETF has attracted $75.7 million since early June, with inflows occurring on days Nvidia’s share price declined.
The surge in Nvidia’s shares has also increased the appeal of these leveraged ETFs among short sellers. Short interest in the GraniteShares ETF rose to about 15% of outstanding shares in early July, up from 1% in April.
These ETFs can be particularly risky for long-term holders, as they are intended for day trading. Investors who hold them for extended periods may face “volatility drag,” which can amplify losses or gains beyond the leverage provided by the fund. This effect can exacerbate losses in a down market due to the daily reset of exposure to Nvidia’s stock price.
“In volatile markets, these leveraged ETFs, which must buy when the stock price rises and sell when it falls, can suffer significant losses,” said Bryan Armour.
