Bullish on Nvidia? This single-stock ETF could offer 1.5 times leverage on the popular chip stock — but be careful what you wish for.

By Isabel Wang

Nvidia's blowout earnings report is boosting this ETF subcategory

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this week's edition, we dig into single-stock ETFs which made a splash in the industry when they debuted a year ago. We also look at some single-stock leveraged funds that target the performance of Nvidia, after the chip maker at the forefront of an industrywide artificial intelligence frenzy delivered blowout earnings that surpassed Wall Street's estimates.

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While Nvidia's earnings reignited the artificial-intelligence (AI) trade in the U.S. stock market, it is no surprise that risk-seeking investors are looking for ways to gain more exposure to the clear leader in the chip manufacturing industry.

Investors in exchange-traded funds with a high risk-reward appetite and are looking for leveraged daily exposure to certain companies may want to consider single-stock ETFs tracking the performance of Nvidia (NVDA), Tesla (TSLA) or Advanced Micro Devices (AMD) as a way to capitalize on growing buzz around these companies, said William Rhind, chief executive officer at GraniteShares, an ETF provider.

Single-stock ETFs, as the name suggests, track the performance of a single company's stock. While traditional ETFs follow a basket of stocks or assets to diversify the funds, single-stock ETFs bet on only one entity with issuers usually offering leveraged exposure which tracks 1.5 to 2 times the daily performance of the underlying company's stocks.

For example, the GraniteShares 1.5x Long Nvidia Daily ETF NVDL, which has over $260 million under management since its launch in December, is designed to deliver 1.5 times the price return for a single day of Nvidia stock. However, its losses will also get magnified, making the use of leverage a risky investment decision.

"You have built-in leverage to the stock or you have built-in ability to short with leverage, so instead of just buying shares of Nvidia, which clearly means there's no leverage, buying 1.5x long Nvidia ETF means that you're getting exposure to the same stock but with 1.5 times of leverage," said Rhind.

See: Single-stock ETFs: 'We're going to see this entire ETF category absolutely explode'

ETF issuers have piled into this new ETF marketplace since July 2022 with AXS Investments launching the first such products that make bearish or bullish bets on the performance of Tesla, Pfizer (PFE), Nike (NKE), Nvidia and PayPal (PYPL).

In the past year, more than 30 single-stock ETFs have been listed in the U.S., which have gathered more than $1.1 billion in total assets, according to 2023 J.P. Morgan Global ETF Handbook published in June. Nearly 67% of the assets in single-stock ETFs are currently in funds that track Tesla, and nearly 16.7% are tracking Nvidia.

Today, there are five asset-management firms actively involved in this sub-category of the ETF market, AXS Investments, Direxion, GraniteShares, Innovator ETFs and YieldMax, while larger asset managers have shied away from such funds.

See: Can Nvidia keep growing so quickly? Here's what Wall Street thinks

Rhind told MarketWatch that strong sentiment in favor of Nvidia and the semiconductor sector will continue as its second-quarter profits continued to explode, thanks largely to a boom in revenue from generative AI.

"It's been a trade of the year without a doubt, and NVDL is probably the best performing ETF of the year," said Rhind, in a phone interview late Wednesday.

The GraniteShares 1.5x Long Nvidia Daily ETF has seen $210.7 million of inflows in 2023 and advanced 421.3% so far this year, compared with Invesco QQQ Trust Series 1 ETF QQQ's $344.9 million inflows and 36.1% of gain over the same period, according to FactSet data. Nvidia shares rose 0.6% on Thursday, putting the stock on pace for a 224.3% advance year-to-date.

However, the blowout results concern some investors who have gauged whether Nvidia's continued growth expectations are too rich. Its high valuation is also suspect for some worried about any geopolitical impact on its growth prospects, including potential U.S.-imposed export restrictions on AI chips to China, where approximately 10% of its revenue could be at risk, said Greg Bassuk, chief executive officer at AXS Investments.

"For investors who believe that Nvidia's stock price faces downside pressure given the potential for it to fall short of the market's outsized growth expectations, it would be prudent to consider the AXS 1.25X NVDA Bear Daily ETF NVDS," said Bassuk, in emailed commentary on Wednesday evening. "For investors who believe that generative AI is more hope than hype and, therefore, that Nvidia as the poster child of that hype, has a higher potential to see profit taking, the NVDS ETF could be a strong solution."

NVDS offers a 1.25x short exposure to the daily performance of Nvidia stock. The fund has attracted $208.9 inflows in 2023, and has lost 81.9% over the same period, according to FactSet data.

GraniteShares on Tuesday launched a similar fund, the GraniteShares 1.5x Short NVDA Daily ETF NVD, the exact flipside of its popular NVDL.

Single-stock ETFs have been facing criticism for being potentially risky as the leveraged position of single-stock funds allows for a heightened profit or loss versus individual stock investing or investing in traditional ETFs which track multiple stocks or assets to lower concentration risk.

"It's not a concern. It's a reality," said Rhind. "This is designed for investors who want to take risk and who are active traders ... and these ETFs are less risky than the majority of leveraged ETFs in the market, which are 3x or 2x leverage, but clearly anything that has leverage is riskier than just buying the underlying stocks, but for the right investor, they are a very popular addition to the active trader toolkit."

FactSet said in a Wednesday research note that purchasers holding shares of the GraniteShares 1.5x Long Nvidia Daily ETF for longer than a day will need to monitor and rebalance their position frequently to attempt to achieve the 1.5x multiple. "Purchasers should conduct their own individual stock research prior to initiating a position and trade with conviction."

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

-Isabel Wang

The good ...

Top performers                                                                                                                                                                         %Performance 
Sprott Uranium Miners ETF URNM                                                                                                                                                         9.1 
abrdn Physical Silver Shares ETF SIVR                                                                                                                                                  7.2 
iShares Silver Trust SLV                                                                                                                                                               7.2 
Global X Uranium ETF URA                                                                                                                                                               7.2 
VanEck Junior Gold Miners ETF GDXJ                                                                                                                                                     5.8 
Source: FactSet data through Wednesday, August 23. Start date August 17. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater. 

... and the bad

Bottom performers                              %Performance 
United States Natural Gas Fund L.P. UNG        -6.5 
VanEck Vietnam ETF VNM                         -5.2 
ProShares Bitcoin Strategy ETF BITO            -4.7 
Xtrackers Harvest CSI China A-shares ETF ASHR  -2.7 
SPDR S&P Regional Banking ETF KRE              -2.3 
Source: FactSet data 

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08-26-23 0842ET

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